The first funding benchmark is the seed stage. This represents the initial capital used to do product and/or service development, patent filings, market surveys and research and business partner recruitment. The emphasis is on examining business idea feasibility and getting the firm ready to commence operations. These funds come predominantly from either the entrepreneur's personal savings, a severance package from a prior job, or cash raised from friends and family members. Many venture capital funds do not invest at the seed stage because the risks are very high.
The second benchmark comes when the venture is ready to launch. Also known as start-up financing, at this stage the business is seeing its first revenues but has yet to show a profit. This is often referred to as the series A round of investment and is typically where the enterprise brings in its first "outside" investors.
After a successful launch proves the viability of the business model, funds will be needed to further develop the marketing plan, hire more staff and management, and establish strategic alliances in the market. That third benchmark is often referred to as the second-stage, or series B, round.
The fourth benchmark involves securing a line of credit from a commercial bank at a time when revenues are gaining momentum. At this point--when monthly cash flow is at break-even--the business merits "working capital." No investors are involved at this point.
When the fifth benchmark arrives, the firm is typically looking to expand its operations at a faster pace. Internal funds (profits and lines of credit) are insufficient to support the development of assets and internal capabilities necessary for stronger sales growth. At this point, the firm seeks to raise another external round of capital from investors, the series C round. Here, capital is used to substantially ramp up existing operations and move the company into a significant position in the industry.
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