(a) Explain the following three stages in a company development when an entrepreneur can seek venture capital: (i) Seed capital finance (ii) Start-up finance (iii) Second round-financing

Question

Accepted Answer

(i) **Seed Capital Finance:** It refers to the capital required by an entrepreneur for conducting research at the pre-commercialization stage. During this stage, the entrepreneur has to convince the investor (VC) why his idea/product is worthwhile. The investor will investigate the technical and the economical feasibility of the idea. In some cases, there is some sort of prototype of the idea/product that is not fully developed or tested. As the risk element at this stage is very high, an investor (VC) may deny assistance if he does not see any potential in the idea.

(ii) **Start-up Finance:** If the idea/product/process is qualified for further investigation and/or investment, the process goes to the start-up stage. A business plan is presented by the entrepreneur to the VC firm. A management team is being formed to run the venture. While the organization is being set up, the idea/product gets its form. The prototype is being developed and fully tested. In some cases, clients are being attracted for initial sales. The VC firm monitors the feasibility of the product and the capability of the management team from the board of directors.

(iii) **Second-round Financing:** At this stage, the idea has been transformed into a product and is being produced and sold. This is the first encounter with the rest of the market and the competitors. The entrepreneur needs assistance from the Venture Capitalist for expansion, modernization, and diversification so that economies of scale and stability could be attained. Larger funds than other early stage financing are required at this time.