Early Stages Of Entrepreneurial Financing

Your business plan should show how much money you will need, if it should be debt or equity, and at what stage or time period it's needed to accomplish what tasks.

For seed and concept companies, the entrepreneur almost always starts with "family and friends" money, and then proceeds on to obtaining informal investor financing prior to attracting the interest of the more formal investors such as venture capital firms.

It will be helpful to understand the accepted "stages of growth" used by financing sources. The early stages are generally referred to as: Seed or Concept, Startup, First, and Second. They are briefly described with Status, Tasks, and Financing as follows:

Seed or Concept

Status. There is an idea, a concept, no management team, no prototype, and patentability has not been determined. No business plan, timetable, or market research has been assembled. Founder(s) may be technicians.

Tasks. To begin development of a prototype, assemble some key management, develop a business plan, assess market potential, structure the company, and assess patentability or proprietary standing.

Financing. Traditional venture capital firms have little interest in funding a company at this stage. The risk level is just too high, and the time for achieving a payout or harvest is not determinable. Personal savings or friends and family money funds this stage. It ends with the completion of a seed stage business plan and the formation of the company.

Start-up

Status. At least one principal person of the company is pursuing the project on a full-time basis. The prototype is being developed, the business plan is being refined, a management team is being identified, market analysis is being undertaken, and tests are being set up or initial customers are identified. More formal funding is being accomplished.

Tasks. Complete and test the prototype and obtain evidence of commercial interest. Assemble and identify an initial management team, finish the business and marketing plans, establish manufacturing and initiate sales.

Financing. Traditional venture capital firms may show an interest at this stage, assuming that a top-rated management team is assembled, patentability or proprietorship is proven, and marketability is demonstrated. Companies at this stage commonly seek funding from private placements, early-stage venture capital firms, and various grants from both foundations and government sources.

First Stage

Status. The company is now a going concern. The product has proven manufacturing and is selling. If it's a service company, some customers have tried the service. The management team is in place, the company has experienced some setbacks, customers can confirm product usage, marketing is being refined, adjustments are being made in the business plan and the money raising efforts continue.

Tasks. To achieve market penetration and initial sales goals, reach close to break even, increase productivity, reduce unit costs, build the sales organization and distribution system.

Financing. At this stage, traditional venture capital firms are interested in investment--in fact, it's their most preferable stage. Financing is needed to get the production bugs worked out and to support initial marketing efforts. At this stage, companies may receive financing from bank loans, leasing companies, and research and development partnerships (for incremental product development). Strategic partnerships are often entered into at this stage with potential customers, suppliers, and manufacturers.

Second Stage

Status. Significant sales are developing as are assets and liabilities. The company is sporadically achieving break even, and cash flow management becomes critical. Second-level management is being identified and hired. Export marketing is being explored and more sophisticated management systems are being put into place.

Tasks. To obtain consistent profitability, add significant sales and back orders, expand sales from regional to national, identify international marketing plans, and obtain working capital to expand marketing, accounts receivable, and inventory.

Financing. More sophisticated and second-round venture capital financing comes into play. Companies at this stage often receive additional funding from second and larger rounds of traditional venture capital, larger companies that are looking for product distribution opportunities, and institutional investors. Other sources could include venture leasing companies (for manufacturing equipment), and; additional strategic partners (often seeking secondary manufacturing and distribution rights both domestically and for foreign countries).