Issue No. 65 - June/July 2012
The Golden Rule
by Conor McKenna
The main reasons businesses require new equity are to commercialise new products and services to: commence commercial operations; finance a growth strategy; change the ownership structure; restructure the business, or change the capital structure of the business (‘recapitalise’).
The venture capital industry classifies Equity Capital by different business stages according to these entrepreneurial needs. The main stages of Equity Capital are:
Seed Capital: This is funding for a pre-revenue venture to support business formation, complete adequate business planning for subsequent stages, reinforce technology/product uniqueness and develop and prove new products and services to a commercial-ready stage.
The seed stage starts with the idea to form a new business and ends when it is ready for its first commercial sales and revenue. This stage is typically funded by the entrepreneur, through investments and loans from friends, family and ‘the faithful’, as well as through government grants and angel investment.
Unless the technology or product is so compelling and is in a very large and global market with a clear exit strategy within three to five years, it is most rare for venture capital funds to invest at this stage.
Start-up Capital: This is funding to commence commercial business operations. Startup refers to commercial start-up: when the new business starts taking and fulfilling commercial orders but is yet to make profit. This sta...