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Financing Your Business - Funding Stages

By J Gary McDaniel, TCV Growth Partner. Cash is the lifeblood of any business. Whether your company is a one-person start-up or a multi-billion dollar global conglomerate, or whether it is a SaaS business or a brick-and-mortar manufacturing business, you can’t run your business without cash. So where does that cash come from? The answer is, and I can hear you groaning now, it depends.

Why? Because sources of capital are directly related to the stage of your business. Microsoft isn’t going to raise capital from Friends and Family and a pre-revenue start-up can’t factor their receivables. So, when looking to finance your business, you need to understand the stage of your business. Then you can look for, and hopefully secure, the most appropriate sources of money for your situation. Way too often I hear start-up companies talking about raising venture capital. They are usually disappointed when I explain to them that they are way too early for VC funding.

Let’s look at some of the common places where you can find capital:

· Personal savings

· Personal and business credit cards / lines of credit

· Friends and Family

· Government Sources / Grants

· Customers (advance payments, product margins)

· Angel Investors

· Crowdfunding

· Banks / Financial Institutions

· SBA loans

· Mezzanine / Project Capital

· Strategic Partners

· Private equity

· Venture capital


Now, let’s discuss when each of these sources of capital is most appropriate:

Note – the following discussion provides general guidelines only. In reality, there are always exceptions and overlap. For example, Angel Investors often reserve capital for “follow-on” investing in later rounds. And, there are some VCs that invest at earlier stages of a company’s development.

Start-ups: Almost all start-ups begin with the founder’s personal savings, credit card debt, friends and family support, and, if available, some kind of grant. This money helps you to develop your product or service to the point of it becoming an MVP (minimum viable product) so that you can begin selling it to your customers.

Early-Stage (0-$2 million in revenue): Once your business has a product or service and begins making sales - and hopefully recurring sales - your business can now begin seeking funding from a new set of sources. These would include your customers (bootstrapping), additional grants, Angel Investors, crowdfunding, and, if you are cash flow positive, banks/financial institutions (asset-based lending), and SBA loans. At this stage you have demonstrated product viability and product-market fit. Therefore, some of the risk of your business has been eliminated and you are now attractive to earlier stage investors, such as Angels, and financiers, such as banks.

Growth Stage ($2 million-$50 million): Now your company is growing, and growth is expensive. As the expression goes, “it takes money to make money”. This is where banks, strategic partners, private equity, and venture capital really come into play. This is because these sources of capital are not interested in taking a lot of risk. What they are interested in is making a return on their investment. By this stage, most of the risk is gone and they are simply financing your growth – a much more palatable proposition. This type of capital usually comes in the form of Loans, Convertible Debt, or the Sale of Equity (common stock or preferred stock). Mezzanine Capital, for example, is usually used to finance specific projects and is in the form of preferred stock or subordinated notes.

Maturity ($50 million+): Depending on your business, when you reach $50 million in revenue you may still be in the Growth Stage, but I had to draw the line somewhere! In fact, you are still considered a small and medium enterprise or “mid-market” company up until you hit $1 billion in revenue. However, in my opinion, once you hit $50 million in revenue your company has reached a level of maturity that puts it in play for an exit should you choose to do so. If you choose not to exit, bank funding or project funding (using notes) is usually your best option because this kind of funding is now available to you and it is non-dilutive. Exits can come from the sale of your assets or your securities to strategic investors (most common), financial institutions, private equity groups, or special purpose vehicles (SPVs). You can also raise money and/or exit via an IPO.

Below is a great graph that was put together by the Angel Capital Association. It illustrates the relationship between various financing sources and the stage of your business:

Bottom line – As a business owner or manager, you will find that you are ALWAYS raising money. And as you do this, make sure you are seeking capital from appropriate sources. Don’t waste a lot of your valuable time chasing money that you have little chance of securing.

Need help on a capital raise? Our team has raised over $50M from virtually every source of funds for every stage of growth. For more information contact


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