Capital Financing is a type of financing by venture capital: the type of private equity capital typically provided to early-stage, high-potential, growth companies in the interest of generating a return through an eventual realization event such as an IPO or trade sale of the company.

1. Overview

To start a new company or to bring a new product to the market, the venture may need to attract financial funding. There are several categories of financing possibilities. If it is a small venture, then perhaps the venture can rely on family funding, loans from friends and personal bank loans.

For more ambitious projects, some companies need more than what mentioned above, some ventures have access to rare funding resources that is called Angel investors. These are private investors who are using their own capital to finance a ventures’ need. However, these funding methods are rare. Apart from these investors, there are also venture capitalist firms (VC-firms) who are specialised in financing new ventures against a lucrative return.

When a venture approaches the last one, the venture is going to do more than negotiating about the financial terms. Apart from the financial resources these firms are offering; the VC-firm also provides the necessary expertise the venture is lacking, such as legal or marketing knowledge. This is also known as Smart Money.

2. Venture Capital Financing Process

As written in the previous paragraph, there are several ways to attract funding. However we are going to look deeper into the financing process by VC-firms. In general, the venture capital financing process can be distinguished into five stages;

1. The Seed stage
2. The Start-up stage
3. The Second stage
4. The Third stage
5. The Bridge/Pre-public stage

Of course the stages can be extended by as many stages as the VC-firm thinks it should be needed, which is done in practice all the time. This is done when the venture did not perform as the VC-firm expected. This is generally caused by bad management or because the market collapsed or a bit of both. The next paragraphs will go into more details about each stage.

The following schematics shown here are called the process data models. All activities that find place in the venture capital financing process are displayed at the left side of the model. Each box stands for a stage of the process and each stage has a number of activities. At the right side, there are concepts. Concepts are visible products/data gathered at each activity. This diagram is according to the modeling technique founded by Professor Sjaak Brinkkemper of the University of Utrecht in the Netherlands.