5 life cycle stages:
a) Development stage:
Feasibility of an idea is first put on trial
Comments and initial reactions from friends and family member
Form an initial test of whether the idea seems worth pursuing further
Reaction and interest level of trusted business professionals provides additional feedback
If early conversations evoke sufficient excitement, the entrepreneurs take the next step: producing a prototype, delivering a trial service, or implementing a trial process.
b) Startup stage:
Occurring when the venture is organized, developed, and an initial revenue model is put in place
Occur between years -0.5 and +0.5
c) Survival stage:
Occur between years +0.5 and +1.5
Revenue start to grow and help pay some of the expenses
Gap is covered by borrowing or allowing others to own a part of the venture
Venture have serious concern about the financial expression they leave on outsiders
d) Rapid-growth stage:
Revenue and cash inflows grow very rapidly
Cash flow from operations grows much more quickly than do cash outflow.
Occur between years +1.5 through +4.5
Value increases rapidly as revenue rise more quickly than expenses
e) Early maturity stage:
Growth of revenue and cash flow continues, but at much slower rates than in the rapid growth stage.
Occur between years +4 and +5
Often coincide with decision by the entrepreneur and other investors to exit the venture through a sale or merger.
Early stage venture: new or very young firms with limited operating histories. They are in their development, startup or survival life cycle stages
Seasoned firm have produced successful operating histories and are in their rapid-growth or maturity life cycle stages.
Operating losses usually occur during the startup and survival stages, with profit beginning and growing during the rapid-growth stage.
Most ventures burn more cash than they build during the early stages of their life cycle and don’t start producing positive free cash flow until the latter part of their rapid-growth stages and during maturity stages.
Types of financing:
1. Seed financing:
Most new ventures will also resort to financial bootstrapping, that is, creative methods, including barter, to minimize the cash needed to fund the venture
Money from personal bank accounts and proceeds from selling other investments are likely source of seed financing
2. Startup financing:
Is financing that takes the venture from a viable business opportunity to the point of initial production and sales
Usually targeted at firms that have assembled a solid management team, developed a business model and plan, and are beginning to generate revenue
Although sales and revenue begin during the startup stage, the use of financial capital is generally much larger than the inflow of cash.
Most startup-stages venture need external equity financing, referred to as venture capital, which is early stage financing capital that often involves a substantial risk of total loss.
3. First round financing:
Is external equity financing, typically provided by venture investors during the venture’s survival stage to cover the cash shortfall when expenses and investments exceed revenue.
4. Second round, mezzanine and liquidity stage financing
Rapid growth in revenue typically involves a prerequisite rapid growth in inventories and account receivable, which require significant external funding
Because inventory expenses are usually paid prior to collecting on the sales related to those inventories, most firms commit sizeable resources to investing in “working capital”
Takes the form of venture capital needed to back working capital expansion.
Provide funds for plant expansion, marketing expenditures, working capital, and product or service improvements.
Obtained through debt that often includes an equity “kicker” or “sweetener” in the form of warrants-right or options to purchase the venture’s stock at a specific be close to leaving