Background of Venture Capital
A venture capital fund (VC) is a pooled investment fund where the venture firm lends capital to businesses/startups in their early stages, seed or formation stages looking at possible growth, scale up phase or expansion in exchange for equity which often rotates around high risk for potentially high reward.
Stages of venture capital financing
As businesses grow and expand at different stages, they may seek different types of funding for either expansion tailored to different stages of a company’s lifecycle. This may range from a significant event like IPOs to exit phase(s). There are usually 07 stages of venture capital financing detailed as follows:
Pre Seed-Stage: During this stage, it is very unlikely that venture capital investors will provide funding or invest in a company in exchange for equity because the company is finding its grounds. It is like investing in “unknown waters.”
At OL & PARTNERS, we often term this stage as the “boot strapping stage of a business”. We normally accompany companies in this stage to:
– Draft and register all incorporation documentation;
– Draft company policies and ensure compliance such as ensuring the intellectual property and trademark due diligence processes are completed;
– Curate a business model and plan.
2. The Seed or Start up Stage: Seed stage funds are usually used for market research and product development. That is, the foundational work required to start any business.
The most common investors at this stage are angel investors and early venture capitalist.
3. First Round Stage (Series A Round): This is financing of a company during the early sales and manufacturing phase to fine tune the product and service. At this stage, companies would rotate around completing a business plan and a pitch deck to ensure product market fit. During this stage Series A investors measure the potential of a Company before funding.
4. Second Round Stage (Series B Round): This is capital for early-stage companies that are selling products and ready to upscale and make profits. Thus, this financing supports product manufacturing, marketing and sales expansion to drive growth and profit.
Series B investors measure performance metrics and product viability. Common investors at this stage include corporate venture funds and late-stage venture capitalist.
5. Third Round Stage (Series C Stage): This stage is usually measured after two- three years of the companies’ activities. At this stage, financing is usually for expansion to reach new markets and acquire other companies.
To receive a Series C funding, companies must have a strong customer base. Some investors at this stage include hedge funds, investment banks and Corporate VC funds.
6.The Mezzanine Stage: Here companies have reached maturity. This stage is also referred to as the bridge or pre- public stage. This is the final stage of a VC process and often transitions to an exit or a merger and acquisition (M & A) phase.
At this stage, the initial investors who invested in the company will usually opt to sell their shares and earn a return on their investments. Other investors who come in (late-stage investors) will either procced to an Initial Public Offering (IPO) or a sale.
7. The Exit Stage: This is funding beyond the venture capitalist. Investors sell their shares or stake in the Company to realize their investment return.
An exit can either be partial (selling part of their shares) or full exit (selling all of the shares) by the investor. An investor may exit either to gain return on the investment or to be able to invest elsewhere.
The Role of OL & PARTNERS in a Venture Capital Process
Our team of experts in VC operations assist you to:
In the case of cross-border transaction, navigate international landscapes to ensure regulatory conformity.
Understand complex investment deals to ensure that they align with strategic goals of the investment to mitigate risk;
Carry out legal due- diligence to identify potential liabilities and ensure regulatory compliance;
Draft all legal documentation relating to the company and the investment operation/transaction;
Negotiate the investment terms in line with the company’s objectives;
Legal advise and guidance on securing venture capital, structuring equity arrangements and negotiating shareholder agreements;