In the beginning stages of a company's growth, the Series A investor is the first professional investor to get involved. Later, when the company is becomes more profitable, gains more traction, and hires more employees, Series B, C, and D investments start trickling in. The last three stages are mezzanine financing, late-stage financing, and financing for an IPO. There are venture firms that specialize in just one type of financing, where they love taking a startup from ideation to a series B-C stage, where they become hands-off, while other firms can take the reigns in pushing forward, all while taking advantage of investing when valuation was lower, making their exit return on investment that much higher (which is not always the case). Before receiving the ever-elusive venture capital investment, you need to have the right network, and nail down a pitch, and have a background in whatever you are building (yes, there is an exception to everything, don't treat them as a rule).
Angel funds that are raised when a startup is in its ultra-early stage and doesn't yet have an MVP or traction. At this early stage, venture capital funding is extremely hard to come by and always smaller in amount, since risk is much higher. Venture capital may be needed to make a prototype of a product/MVP, pay for market research, or pay for the initial costs of setting up a business'. structure
At this point, your company has a working prototype or MVP of its product, and at least one of its founders will be working full-time. At this point, projects rarely have heavy traction (i.e. revenue). This stage consists of adding key management members, interviewing ideal customer profiles, and making sure the product is functional before releasing it to its early adopters.
Your business has been open for two to three years, you have a strong core team, and early traction is evident. Venture capital may be the way to reach the next inflection point, if there are needs for a new product offering, another core team member, or geographic expansion.
You have set up an offer that is generating revenue, and systems in place to fulfill that offer, as well as continuously attracting more customers for your business, and are now ready to pitch a venture capital firm for money. With a successful fundraise, the first motivation is hiring ultra-talented team members to keep the momentum up, as well as bringing in more dollars.
You've gotten to this point in your business because you've added a true management team, and YoY revenue is trending favorably. Additional funding could be used to increase production, boost advertising, or a myriad of other things that founders love spending money on (the Art Basel parties might not be super relevant being too early stage).
Before deciding on being acquired (once large enough to warrant the stoppage of venture financings), partnering with an investment bank is a necessity in order to find a vetted buyer or to obtain public funding via a stock issue. and this is where "bridge financing" comes in, as there are mezzanine and "bridged" short-term financing options that may help you pay for the expenses of an initial public offering (IPO). Since most startups, even at this stage, are not very cash rich (due to them putting there capital to work), this helps keep their dollars focused on growth instead of being put towards a fundraise, which can also hurt a valuation.
For the venture capitalist, the risk/return ratio is always high, however, making 29 bets that fail, and one that makes them a billion dollars is still a good days work. It's important to remember that the sooner a VC invests, the higher the risks are and the longer it will be until the VC can cash out. Venture capitalists want a bigger return on their money because they are taking on more risk (usually a 10x return between four to seven years). In that time, a late-stage venture capitalist can expect to get back two to four times what they put in.
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