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Venture Capital Stages Explained

Updated on January 30, 2012

The world of venture capital may seem awfully fast-paced, but its processes and cycles are pretty straightforward. Companies in which VC firms invest go through three primary stages, at least from the VC perspective.

These three stages are roughly viewed as the early stage, the expansion stage, and the acquisition or buyout stage. A company's stage will influence the sorts of funds its managers might expect to garner, as well as the sorts of VCs it might approach, as some specialize on only one particular stage of development. Let's have a closer look at each stage below.

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The Early Stage

A company in its early stages is only just getting started. Its product or service is not available on the market- perhaps it only exists as a concept, or perhaps it is in development.

At this point, the company might need funds to help it get started. Should its founders be particularly well connected, or should they give a strong enough pitch to a VC firm, the company might expect to get anything from 25 to 250 thousand dollars, depending on its requirements.

The funds that the company may get at this stage could be called one of two things: seed capital or start-up capital. Seed capital is given to companies whose product or idea has yet to be developed. Seed capital is meant to help entrepreneurs conduct market research, create prototypes, and test them out. Start-up capital is given to early-stage companies that have already developed a product or service and need some extra help to introduce it to the general public. Start-up capital is intended to be used for marketing, distribution, and public relations support.

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The Expansion Stage

During the expansion stage, a company's product or service is introduced to the market and its owners are working to expand its userbase through new advertising campaigns, versions, or improvements.

There are four widely accepted stages of a company's expansion phase:

  1. In the first stage, a company is producing the product or service at full scale so that it may be introduced to the market at large
  2. In the second stage, a company's product or service is being sold, but has et to make a profit
  3. In the third stage, a company is turning a profit, but now seeks to expand its clientele through new advertising campaigns or perhaps the introduction of new products or expanded services
  4. If a company makes it to this stage, it has done quite well, and is considering its transition to the acquisition or buyout stage, or perhaps an IPO

VC funding in the first stage will enable a company to produce its initial burst of products or hire the resources or staff necessary to provide whatever service the company offers. Funding given in the second stage may help a company to continue to sell its product or service by giving it the funds to produce them before profits manage to cover such needs. Funding in the third stage may be directed toward new product development or renewed advertising efforts. In the fourth stage, funding (in this case, called bridge financing) is designated to help the company work its way to an IPO.

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The Acquisition / Buyout Stage

At this point, a company has done all it can really do independently in its current market and is ready to more aggressively dominate its field- or move on to new areas.

Should the company decide to take the acquisition route, it might consider acquiring one of its competitors (if it is permitted to do so) or to even acquire a company in a new market that is complimentary to the market in which it already operates (perhaps to aid with some vertical integration to allow for better supply chain control).

In this case, a company might seek VC capital to make this sort of large scale purpose. While seed and start-up capital funds range in the tens to hundreds of thousands, funds in this stage are more in the range of millions.

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    • mel22 profile image

      mel22 

      6 years ago from ,

      So what stage is Hubpages in? The making a million but spending a million on wages and expenses for no profit phase.No problem, Just ask the VC for another couple million. He's loaded, he'll never know the difference and they can keep making those $100,ooo annual wages for the next 5 years until it goes defunct. WOOHOO!... just kidding... kind of!

    • BusinessTime profile image

      Sarah Kolb-Williams 

      6 years ago from Twin Cities

      Very informative -- thanks for the great info.

    • Simone Smith profile imageAUTHOR

      Simone Haruko Smith 

      6 years ago from San Francisco

      That must have been an interesting experience, Camille! To be honest with you, that's the stage I find to be most exciting.

    • Camille Harris profile image

      Camille Harris 

      6 years ago from SF Bay Area

      Thanks for breaking it down, Simone. I worked at a company that was in its early stage, but sadly it never made it past getting start-up capital. It was like purgatory, but it taught me a lot about business. Informative Hub!

    • Simone Smith profile imageAUTHOR

      Simone Haruko Smith 

      7 years ago from San Francisco

      Good eye, kenny thomas; good eye ;)

    • kenny thomas profile image

      kenny thomas 

      7 years ago from Australia

      Thats a cannabis seedling lol, great hub.

    • Simone Smith profile imageAUTHOR

      Simone Haruko Smith 

      7 years ago from San Francisco

      Wow, lucky you, Hyphenbird! And thanks for reading drbj and Peggy W!

    • Peggy W profile image

      Peggy Woods 

      7 years ago from Houston, Texas

      You are one smart cookie! Thanks for explaining Venture Capital Stages in easy to understand format. Well done. Rated useful.

    • drbj profile image

      drbj and sherry 

      7 years ago from south Florida

      Thanks, Simone, for this excellent and easy-to-understand exposition of the various stages of VC funding.

    • Hyphenbird profile image

      Brenda Barnes 

      7 years ago from America-Broken But Still Beautiful

      I have been working with a company concerning this very thing. Thanks for the information.

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