Mezzanine Financing – Startup Funding Life Cycle

The growth stage of a new business or venture which began late in the “Early Stage” proceeds into later “expansion” stages where they typically require mezzanine or bridge funding.  Such funding is usually made up of convertible debt or preferred shares, which are more costly than common and provide investors certain rights over the holders of common equity.  Mezzanine financing is typically known as bridge financing because it finances the growth of expanding companies prior to an IPO.

Companies in these later stages of development generally have fully vetted business models, have put in place a broader, multi-functional team, have commercialized their product and achieved reasonable sales momentum and are looking for additional financing to exponentially scale or grow the company.  The objective of the mezzanine funding is to add the fuel necessary to accelerate the growth curve of the company significantly.

Venture Capital is a type of private equity capital in which seed, early stage, growth, (Series A) and mezzanine, (Expansion) funding is provided to ventures to support their growth, development and expansion, in exchange for equity.  While earlier round financing is less common and convertible debt may also be utilized, preferred equity which provides certain investor’s rights is the typical investment instrument in the later, Series A rounds, which are much more common to the VC.  The objective of the VC is to generate a return through the realization of a future liquidation event, such as a sale to a strategic player or an IPO.  Venture capital firms source their funds for investment from high net worth individuals through funds which are professionally managed, and invest the funds on behalf of these individuals in return for an annual management fee and carried interest on the profits of the fund.

Background Information

An individual who provides financial capital for venture investment as well as managerial and / or technical expertise is generally referred to as a venture capitalist.  These resources are usually invested through a “pooled investment vehicle”, such as an LLC or LP, (Fund), and invest primarily in highly risky but scalable seed, early and growth stage ventures which have difficulty obtaining funds from the capital markets or banks.  These funds are typically professionally managed by venture capital firms which may also employ managerial and technical experts with deep business and industry experience.

There are two primary types of venture capital providers.  The first is the venture capital firm which is generally recognized by the public for providing financial capital or resources focused primarily for the objective of a financial return for its investors.  Corporate venture capital is funds from existing corporations which invest their monies and expertise directly into startups external to the corporation, for both strategic and financial purposes.   Corporate venture capital is a significant subset of the venture capital industry.

The objectives of venture capital firms vary significantly as do their approaches.  As noted above some may invest with financial goals in mind while others invest for strategic purposes.  A recent phenom is the creation of firms with a societal focus.   Venture capital firms may focus on startup companies in different stages of development or from different industries.  Some may operate locally only while others operate regionally, nationally or globally.  Some may invest only in disruptive concepts while others invest in existing established companies which simply need support to grow.   They invest in differing business models with differing growth curves, trajectories and capital intensity.  It is therefore very important that the entrepreneur fully understand the objectives and approach of the venture capital firm in order to utilize their time and resources as efficiently as possible.

Resources

African Venture Capital AssociationAfrican Venture Capital Association, (AVCANET) is an industry body which operates across Africa to promote and enable private equity on the continent.

Australian Private Equity & Venture Capital Association LTD: Australian Private Equity & Venture Capital Association LTD, (AVCAL) is an Australian association representing the private equity and venture capital industries in the country.

Canadian Venture Capital & Private Equity Association: Canadian Venture Capital & Private Equity Association, (CVCA) promotes the venture capital and private equity industries in Canada.

Digital Venture Capital Association: Digital Venture Capital Association, (DigitalVCA) is a non-profit which represents the venture capital and private equity industries globally with the objective of growing the digital and high growth technology sectors for the benefit of society.

European Venture Capital Association: European Venture Capital Association, (EVCA) seeks to shape the future direction of the European private equity and venture capital industries while promoting it to its stakeholders.

Hong Kong Venture Capital and Private Equity Association: Hong Kong Venture Capital and Private Equity Association, (HKVCA) was established in 1987 to promote and protect the interests of the venture capital industry in Hong Kong.

Indian Private Equity & Venture Capital Association: Indian Private Equity & Venture Capital Association, (IVCA) established in 1993 seeks to promote the development of the venture capital and private equity industry and to support entrepreneurial activity and innovation in India.

Latin American Venture Capital Association: Latin American Venture Capital Association, (LAVCA) is a non-profit association which is supports the growth of the private equity and venture capital industries in Latin America.

National Venture Capital Association, (NVCA): National Venture Capital Association, (NVCA) advocates for the US venture capital community encouraging policies that encourage innovation and reward long term investment.

New Zealand Venture Capital Association, (NZVCA): New Zealand Venture Capital Association, (NZVCA) has, as its mission to ”develop a world-best venture capital and private equity environment for the benefit of investors and entrepreneurs in New Zealand.

Tools

VC Options, a TurboFunderSM Tool enables the user to search our database of VC Firms providing financial capital to find those firms which offer capabilities and have established investment criteria which best aligns you’re your company’s needs.

Corporate VC Options, a TurboFunderSM Tool enables the user to search our database of VC Firms providing strategic capital to find those firms which offer capabilities and have established investment criteria which best aligns you’re your company’s needs.

The VC Options and Corporate VC Options Tools developed by the Sages permits you to utilize our processes to identify potential VC or Corporate VC investment matches resulting in a substantial reduction in your research time.  Spending the time to research several hundred VC / Corporate VC alternatives is time consuming and inefficient, especially if you can otherwise utilize this time to obtain a higher level of focus on issues directly related to your company’s growth and development.

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