The 6 Types Of Venture Capital Funding – Explained

Different types of Venture Capital Funding are available for all types of businesses. They are classified according to various stages of the business needs and categorized as early-stage funding, expansion funding, and acquisition funding.

The important need to run a successful startup company is getting sufficient funds whenever necessary. Although, different types of funding available for startups, Venture Capital firms play a crucial role to fund for early stage startups. 

With the help of Venture Capital Firms, in recent years many startups are emerging with financial stability when compared to the previous decade, having said that the idea is feasible to make money.

Be it a startup company or a well-established business venture, VC Funds will be useful for you. But You have to approach the right investors at right time. 

To explore more, let’s check out the 6 different types of Venture Capital Funding, here…

6 Types Of Venture Capital Funding

The six types of venture capital funding are

  • Early Stage Funding
    • Seed Funding
    • Startup Funding
    • First Stage Funding
  • Expansion Funding
    • Second Stage Funding
    • Bridge Funding
  • Acquisition Or Buyout Funding

Early Stage Funding

Early Stage Funding is sub-divided into three categories.

Seed Funding

Many entrepreneurs, at the beginning of the start-up idea, seek seed funding from Venture Capitalists.

Even though the product is not developed, Venture Capital firms show interest in your idea by checking the proof of concept and the type of business model you choose.

This is a very small amount of money where it will be useful to do market research and to create a sample product.

Before reaching out to the venture capitalists at the seed stage, the founders must validate the startup idea. Because if the idea is not feasible for VCs, they do not show interest in investing. This will make it hard for you to move further.

Start-up Funding

Start-up funding refers to the amount of money funded to the company’s initial setup process to develop the working prototype.

This covers

  • Office space,
  • Recruiting staff, and
  • To do further market research.

Since there will be no proof of the growth at this stage, entrepreneurs need more effort to get this small amount from the VC firms. They can also seek an expert to guide and develop their business to make the business profitable at the initial stages.

What VCs look for?

It is all about your management effort to show the market analysis. This must depict the valuable customers to your company. They exactly look for a customer base. Will you be able to expand your business?

VCs check these factors, forecast, and decide to invest in your company.

First Stage Funding

Funding at this stage is provided for the companies that show growth after two or three years. Venture Capital firms fund at this stage to maximize productivity, to increase sales, advertising, and marketing activities.

This will be a large sum of money that will help your company to reach a wider group of the audience which creates brand awareness and makes your company a well-established one.

Expansion Funding

Expansion Funding is sub-divided into two categories.

Second Stage Funding

Second stage funding is provided to the well-established companies which show increased growth and revenue.

After reaching a larger audience, the entrepreneurs may wish to expand their business to the next level. 

For this purpose, venture capital firms lend a huge amount of money for returns in terms of equity. This would be helpful for your company to increase its production capacity and to enter new markets.

One crucial thing to consider at this stage is your competitors. Will you be able to compete and gain a competitive advantage?

If this question is answered well by your team, then VCs show interest in investing in your company at this stage.

Bridge Funding or Mezzanine Funding

Bridge funding is used to meet the needs for the short-term purpose. There are some VC firms to help the business which provides funds for a short-term period until you get the large fund.

This is simply called bridging the gap.

Bridge funding is also known as Mezzanine funding which will be useful for the short term if the company plans to go for Initial Public Offering (IPO).

Acquisition or Buyout Funding

Acquisition funding is useful for acquiring a part of a business or the entire business of another company.

If your company shows sustained growth over a period of time and if you are planning to expand your business by acquiring other businesses, you can reach out to VC firms to get financial assistance.

Buyout funding is obtained to acquire an asset of other companies that are underperforming for a long time. The asset of the other companies can be used as collateral for getting finance from the VC firms. 

Reader’s Insight

Let us know if we missed out on anything in this article types of venture capital funding and share your thoughts in the comment section.

Leave a Comment

Your email address will not be published. Required fields are marked *