Follow by Email

Sunday, February 12, 2012

The Venture Capital Financing Process(Part Deux)

Venture capital (VC) funding is typically used by enterprises that are early-stage, high-risk, high-potential growth startup companies.  Many times they are already generating revenue for their product or service, even though they may not be profitable yet.

Round and round we go

In the venture capital game financing rounds typically have names that relate to the class of stock being sold:

    The seed round is where company insiders provide start-up capital.
    The Angel round is where early outside investors can buy common stock.

Under normal circumstances the company will have advanced its cause by the time of the next round.  As a result, each subsequent round of venture capital reflects a different valuation (i.e. if the company is prospering, the Series B round will value company stock higher than Series A, and Series C will have a higher stock price than Series B).

On the other hand, if the company is not prospering, it can still get subsequent Series-rounds of financing, but the valuation will be lower than the previous series: this is referred to as a “down round.”

These “down rounds” may also include “strategic investors” who participate in the round and also offer value in their area of expertise such as marketing or technology assistance.

After a “down round” where the company fails to meet established growth objectives they can essentially re-start under a new group of funders. These rounds are identified as series AA, BB, etc.

After that we get into the ‘Alphabet Soup Rounds’

The first of the Alphabet rounds is known as "A round" or "A round financing".  This is the first round of financing for a new business venture after the seed capital is received.  In most instances this will be the first time that company ownership is offered to outside investors.

By this point in time the company should be generating some revenue but is probably not yet profitable.  The investors at this stage are venture capital funds or angel investors who are willing to accept higher risk for the prospect of higher returns.

As the company grows and requires even more capital, each subsequent round of preferred stock issued to investors takes on the next letter in the alphabet.  This way investors know where they stand in the pecking order of claiming future profits.

At each stage, the company gets revalued.

The second round of financing for a company by private equity investors or venture capitalists is known as Series B.  This round usually takes place once certain milestones have been reached by the organization.

The third round of financing is called, guess what? Series C and usually represents an additional expansion stage for the company.  At this stage the company has proven successful in the market and has the potential for an even larger market.

Series Round D financing (along with series C) represent the final stages in the Early Financing cycle. Usually these are the final steps in the company’s growth cycle before the IPO (Initial Public Offering) or the sale of the company to another group of investors.

During the Series A, B, C, etc. rounds of financing, the company typically receives money from investors in exchange for preferred stock.  As a side note insiders, seed capital investors and angel investors usually receive common stock. Private equity investors generally prefer convertible preferred stock to common stock.

Holders of preferred stock have a greater claim to a company’s assets and earnings. In addition if a company is forced to liquidate in order to pay creditors and bondholders, common stock holders receive no money until after preferred shareholders are paid out.

Tuesday, February 7, 2012


With the media frenzy that Facebook has caused on the way to a possible $100 billion IPO, I thought it might be appropriate to discuss the venture capital process and how it affects both the company and the market.

As a credit professional, I’ve dealt with established Fortune 1000 companies as well as quite of few start-ups.  Along the way I’ve had to come up with a few ways to establish acceptable thresholds of risk depending upon where the companies were in their growth stages and what sort of risk was hanging in the balance.

Venture capital is provided to early-stage companies, with high potential (and high-risk) for growth. They make their money by having equity in the firms in which they invest.  So, to put it mildly, they have “skin in the game.”

All venture capital is private equity, but not all-private equity is venture capital.

If the enterprise is a small venture, then perhaps they can rely on such capital sources as family funding, loans from friends, personal bank loans or crowd funding.

Some ventures have access to rare funding resources called Angel investors. These are private investors who are using their own capital to finance a ventures’ need but they take a passive role regarding company management.

For more ambitious projects, something a bit more substantial is in order.  For these situations often times a pooled investment (often an LLC) will provide funding that is too risky for standard capital markets or bank loans.


Seed stage funding - Typically used to pay for market research and development. Seed capital is generally provided by those with a connection to the new enterprise although it could come from the founders themselves. It is not unusual for seed funding to come from family, friends or angel investors.  These investment dollars tend to be lower (in quantity) and the risk very high.

First stage (start-up stage) – A business plan gets presented to the venture capital firms, a management team gets formed to run the venture, if a board of directors exists, a member of the venture capital firm will take a seat on the board of directors. After reading the business plan and the proper consultation, the investor decides whether or not the idea is worth further development.

Second stage – At this stage the idea has now been transformed into a tangible product and is likely being produced and sold.  The venture is striving to reach the break-even point. The management team must prove its’ mettle to the venture capitalists. The VC firm will monitor how management navigates the development process and deals with competitors.

Third stage – The capital that is provided to a company with an established commercial production and a basic marketing set-up, looking for market / plant expansion, acquisitions, and product development. At this stage the company should be enjoying revenue growth but may not yet realize a profit.

Mezzanine stage – This is late-stage venture capital, usually describing a company which is somewhere between startup and IPO. To be even more exact Mezzanine Financing is for a company expecting to go public usually within 6 to 12 months.  The expectation is that the proceeds from a public offering will repay this financing or at least establish an opening price for the IPO.

The further along the process a company goes, less risky the VC-firm’s investment becomes.



Thursday, February 2, 2012


 A recent article proclaimed that there would be 32.4 million replacement job openings between 2008 and 2018, as baby-boomers exit the workforce.  The first thought that came to mind was, “Really…how can we be certain that these folks can even afford to retire?”

A completely different article stated that young Americans seemed to be having a much tougher time finding work than older workers. It seems that the overall workforce is getting older. Workforce participation of workers over 55 has risen 11 percent since December 2007.

The consensus seems to point to the fact that many workers will need to remain in the workforce to approximately 70 years of age in order to replenish the losses of recent years.  Think about that. Of course this is assuming that they are able to find someone willing to employ them at that point in their lives.

But even if older workers decide to stick around an additional 5 years, think about the impact that decision will have on the following generations of workers.

Hypothetically speaking, a 65-70 year old worker remaining in the workforce has an impact on the average 45-50 year old worker, who in turn impacts the work life of the average 25-30 year old worker and so it goes.

Through in the greatest economic downturn since the Great Depression and you can see where this is headed.

The truth is a little murkier than what we would think intuitively. No one owns any particular job. The economy is always creating new opportunities. As we know, businesses get created and others go the way of the dinosaurs.  In addition, how often is a younger person in direct competition for the position currently held by an older worker?

Do you think that older workers end up hurting the younger set by sticking around longer?