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Process Of Venture Capital Funding

Venture capitalists are generally very choosy and careful to decide where to invest.

Generally speaking, it is seen that out of a couple of hundreds of opportunities presented,

venture capital funding firm may invest in one. So, what is the whole process of venture capital funding? Well, find the answer in this article.

Venture capital firms are most interested in projects with remarkably high growth potential, which will possibly provide the financial returns within the required timeframe.

As the investments are not liquid and need at least 3-7 years to nurture, venture capitalists are extra cautious and carry out detailed due thoroughness before any investment. They are also expected to look after the companies in which they invest, so as to raise the likelihood of reaching an IPO stage under favorable valuations.

The venture capital funding process typically involves four phases in the company's development:

·        Idea generation

·        Start-up

·        Ramp up

·        Exit

The venture capital funding procedure gets complete in generally six stages of financing corresponding to these periods of a company's development:

  • Seed Money: Low level financing for proving a new idea
  • Start-up: New firms needing funds for expenses related with marketing and product development
  • First-Round: Manufacturing and early sales funds
  •  Second-Round: Operational capital for early stage companies which are selling product, but not returning a profit
  • Third-Round: Also known as Mezzanine financing, this is the money for expanding a newly advantageous company
  • Fourth-Round: Also labeled as  bridge financing, 4th round is proposed for financing the "going public" process

It is the need for lofty returns that makes the process of VC funding not only expensive, but also very detailed. It is a most suitable option for funding a costly capital source for companies, and most for businesses having large up-front capital requirements which have no other cheap alternatives. Software and other intellectual property are generally the most common cases whose value is unproven. This explains why venture capital funding is most widespread in the fast-growing technology and biotechnology fields.

If a project does have the qualities which venture capitalists are looking for, then it would be easier to build venture capital. A good solid business plan, excellent management team, enthusiasm from the founders, with a good prospective for exiting the investment before the conclusion of their funding cycle are some of the qualities of a good business plan to start the process of venture capital funding.