From Startup to Exit: 5 Key Stages of the Financing Lifecycle
Published:
May 10, 2016
Author(s):
This publication has been updated as at April 18, 2022.
Access to sufficient capital is always a business issue, from the startup stage right through to the exit stage. But the reasons for the financing need – product research and development, market validation, operations, growth – and the typical sources of that financing vary depending on where the business is in its financing lifecycle. To help you get started or know what’s coming, here’s a summary of the five key stages of the financing lifecycle.
Stage 1 Concept Financing
In this beginning stage, the founder is developing and completing an initial validation of a business concept. Financial resources will be minimal, often consisting of self-funding or loans from friends and family members.
Stage 2 Seed Financing
At the seed stage, the startup will have increased costs as the founder incorporates the business and devotes more time to validating the concept, defining the market and developing the product. Funding options at this stage typically include one or both of:
- Non-dilutive funding in the form of government grants and loans.
- Investments from friends, family and close business associates and “accredited” angel investors, through equity-based funding options, like Simple Agreements for Future Equity (SAFEs) or convertible debt.
Startups often attract angel investors by participating in a provincial small business investor incentive program. To secure angel investments, the founder may have to give up some management oversight to the new investors. However, angel investors often provide more than just capital, contributing input and guidance about management and other aspects of running the business.
Stage 3 Launch Financing
When the business is ready to officially launch its product to market, it will need to ramp up spending to hire personnel and create relationships with partners, suppliers and customers – with little or no incoming revenue. At this stage, the business might begin looking for early stage venture capital funding (typically from venture capital funds or other institutional investors as opposed to individual investors) or financing through strategic investors while continuing to raise money from established angel investors. These types of investors spend more time on due diligence and negotiating a term sheet before investing, and to attract them, the founder will have to give up greater control over the business. In exchange, the founder will gain mentorship from experienced industry leaders, access to a broader network of partners and investors, and help implementing good corporate governance practices to give the business a leg up as it continues to grow.
Stage 4 Growth Financing
Once a product has been successfully accepted by the market, the business will be looking to grow and expand its reach. If the business’s revenue stream isn’t enough to support the targeted growth, it will need to raise more money. Larger venture capital funding, sometimes in multiple rounds (Series A, B, and so on), is common at this stage. The company might also use venture capital or angel investor funding at this stage to bridge to an exit transaction or a public offering.
Stage 5 Maturity/Exit Financing
Once the business has matured, additional financing options will become available for growth and expansion opportunities. For example, the company might decide to undertake an initial public offering (IPO) or an alternative “go public” transaction to raise money in the public markets and achieve liquidity for its investors or obtain bank debt financing that isn’t accessible to earlier stage companies. At this stage, the company might also move forward with an exit transaction through an acquisition by or a merger with another company.
Please contact your McInnes Cooper lawyer or any member of our Emerging & High Growth Companies Team @ McInnes Cooper to discuss how to get your company the financing it needs now.
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