Mezzanine Financing – Startup Funding Life Cycle

The growth stage of a new venture that is late in the “Early Stage” continues into expansion stages that typically require mezzanine or bridge funding.  This form of funding is made up of convertible debt or preferred shares, which are more costly 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 the later stages of development generally have fully vetted business models, put in place a broad, multi-functional team, commercialized their product, and achieved reasonable sales momentum. The next step forward is to find additional financing to scale the company.  The objective of the mezzanine funding is to add the fuel necessary to significantly accelerate the growth curve of the company.

Venture Capital is a type of private equity capital in which concept, seed, early, growth (Series A), and mezzanine funding are provided to ventures to support their growth, development, and expansion, in exchange for equity. Earlier round financing is less common and convertible debt is utilized; however, preferred equity is the typical form of investment in the later Series A rounds, which are much more common to the VC. VCs want to generate a return through 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 professionally managed funds, then invest the funds 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 and invest primarily in highly risky but scalable seed, early and growth stage ventures. These funds are professionally managed by venture capital firms. The firms may employ managerial and technical experts with business and industry experience.

Two Types of Venture Capital Providers. 

  1. Venture Capital Funds – This firm is generally recognized by the public for providing financial capital or resources focused primarily on a financial return for its investors.
  2. Corporate Venture Capital Funds – CVCs come from existing corporations that invest their money 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’s 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.

Worldwide Venture Capital Groups

African Venture Capital Association
African 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.