Venture capital traces its history to the mid-1940s when organized investing into developmental stage companies first began. Fast-forward 70 years, and ‘venture capital’ is an umbrella term for a large and multifaceted industry.
Total invested dollars in venture capital are at a decade high, slowly rising to its historical high during the dot-com bubble. However, while invested dollars are rising, deal count is decreasing. The availability has allowed startups to stay private longer than ever before and made the path to IPO a much longer time horizon.
The nomenclature around investment categories is constantly shifting; currently, there are 3 commonly referenced stages within venture capital:
• Early stage (typically Series A-C)
• Growth (typically Series D+)
Venture capital firms lie anywhere on or between these stages and fill voids in the market for financing.
The earliest stage of venture funding, the pre-seed/seed stage, is typically occupied by friends, family, and angel investors, with increasing competition from institutional funds. Seed stage companies are newly formed companies with little to no operating history. Investments at this stage are extremely network-driven and rest entirely on concept viability and the confidence in the founding team as determined by an investor.
Early stage capital is primarily allocated toward market research, product development, and business enhancements. Investors in the early stage seek companies that have a completed business plan and demonstrate some level of concept validation through key customers but are usually not cash flow positive. Businesses in this stage need cash to fuel staffing requirements, capacity/inventory, and other strategic capital expenditures.
Growth stage investors focus on companies with proven business models with a clear path to profitability. Firms investing in this space seek companies with existing sales and a strong pipeline. Companies seeking funding in this round use the raise to aggressively penetrate the market. Subsequent rounds of growth stage capital, sometimes referred to as late stage capital, are reserved for relatively mature companies seeking to raise large rounds for specific strategic initiatives (like geographic expansion, acquisitions, investment in PP&E, etc.) that will further clear the path to market dominance and a subsequent exit.
While these three categories all typically encompass primary capital used to fund company operations and initiatives, growth and late stage capital rounds often include secondary shares where founders, employees and early investors also sell their holdings to later investors. Secondary shares can also be available through broker-dealers or exchanges like SharesPost and EquityZen.
As part of any healthy portfolio, diversification is key. Based on your existing portfolio and exposure, you may benefit from investing on either end of the venture capital cycle. If you are interested in learning more about how you can tap into the rapidly growing venture capital market, get in touch with us at email@example.com.
Originally published in the October 2018 LVAM Newsletter.