Seed Capital Funding Cycle
Successful businesses are well-planned and well-capitalized. Successful
capitalization requires having the ability to access capital when you
need it. And in most cases, it does not mean immediately finding a venture
capitalist willing to fund your venture. The fact is that only 0.1 percent
of all business investment capital comes from established Institutional
Venture Capital funds.1
Many entrepreneurs lose valuable time and opportunities during their
search for capital because they chase after investments they cannot
obtain. They do not take the time to study what they are attempting
to do and determine who might be interested in their venture. Many entrepreneurs
begin their search for capital from the wrong source without taking
the time to determine if they meet the source's criteria or interests.
An entrepreneur with a concept for a new product is faced with very
few options to intrigue investors. With no product and no revenue models,
very few large investors are willing to provide any amount of capital
without a guarantee of a (large) return on their investment. Therefore
the initial funding primarily comes from sweat equity and personal savings
to develop a working model of the product. The source of funds may include
personal savings, personal equity, family and friends.
At the next stage of the funding cycle, entrepreneurs need seed capital
to support critical early-stage research and development of their intellectual
property. The entrepreneur may require $25k to $500k from informal investors
to develop the working model into a prototype, create the initial product
and carry out the initial marketing efforts. An often-overlooked source
of seed funding by entrepreneurs is the federal government's Small Business
Innovation Research (SBIR) program.
After the seed capital is used, additional pre-venture capital is needed
to introduce the product to the marketplace. The entrepreneur may need
to seek out other active informal investors who could provide $0.5 to
$1 million in funding to continue the development of the product and
market models.
Once the entrepreneur starts to produce the product and begins to actually
generate revenue, she might approach institutional venture capitalists
who might be willing to invest $3 million to $5 million into the business.
Keep in mind it takes a considerable amount of planning and negotiating
with venture capitalist to secure funding. A savvy venture capitalist
is interested in very high returns on his investment from defendable
and sustainable revenue models.
Statistics show that a significant number of businesses fail. The high
failure rate is the direct result of improper planning and understanding
of capital. Take the opportunity to develop plans and understand your
capital needs throughout the different stages of your business. This
time spent may well lead to a successful business adventure.
1 The Art and Science
of Obtaining Venture Capital, by J. Corey Pierce.
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Authored by: John Parfet, Business and Industry
Specialist, University of Missouri Extension
Source: Creating Quality Newsletter, Volume
12, Number 3, March 2003
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