Should you raise >$10M in early stages? - 101 Founder's Course In Private Equity & Venture Capital - 2 (2024)

So, in the last lesson, we learnt a little something about financing and its stages.

Here's the link to Lesson 1 in case you missed it.

Before we proceed,

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Now, coming back to our lesson, let's learn a few more basics today to help us sail the financial waters.

Seed Financing

Most complex and riskiest activity among the PE investment. It happens at the idea stage.

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2 major risks involved - a) Capability of idea to generate the output. b) the marketability of the output once it has been generated.

Because this stage is so risky, there are a certain rules Investors follow -

1. 100/10/1 Rule - Investor screens 100 projects, finance 10 of them, and be lucky & able to enough to find the 1 successful one.
2. Sudden Death Risk - Where the founder stops/loses capability to work on the idea. Investors usually choose the incubator strategy to avoid this risk.
3. Size of the market - Usually, the investors invest only in the markets they know. However, they may choose to invest in some ideas for philanthropy.

Startup Financing

The startup financing stage means financing a new company that starting its own initial operations.

It's risky, as PEI is still betting on the business plan.

Several ways PE insulates themselves from critical risk -

1. Put option - This tool allows investor to sell back their share to the founder. It assumes that in case a business plan doesn't work out, the founder will have the money buy back the shares.
2. Collateral - This is a pledge for the investor over some valuable assets of the newly founded company. It is usually used with the put option.
3. Stock options for the inventor - Another way to reduce the risk to the business plan is to grant the inventor some stock options.

Balance between money and shares - The investor doesn't want to bear all the risk, i.e., own the majority chunk of the business, nor they want to have no say in the business, i.e., owning let's say only 1% in the company.

Early Growth Financing

Early growth Financing is the financing of the first phase of growth of a new company that has started generating sales.

Company needs cash to boost sales.

The risk for the investor is still high. Hence, the investor might help the company rewrite its business plan, if it deems fit.

Usually, financing at this stage is up to the end of 3 years since the start of a company.

This is it for today's PE & VC lessons.

In the next lesson, we will talk about Expansion, Replacement, and Vulture Financing.

Buckle up!! It is just the beginning of many more informational posts yet to come.

Also, you can use this link to Learn more about entrepreneurship on Medium.

See ya. Till then, Tata.