Venture capital firms are differentiated based on the focus of their investments. Typical criteria include industry and geographic preferences, deal size and stage of business development. Venture capital firms typically define stage of business development by the intended use of the funds provided.

• Seed Capital: Funds are allocated to develop a business concept, conduct research, produce prototypes and bring the company to the point where it has a commercially viable product or service offering. Seed capital is very difficult to obtain through venture capital providers since the level of risk is so high, the investment amount tends to be small and a high level of monitoring is required. However, venture capital firms that specialize in this stage do exist for exceptional business opportunities. Angel investors may be a better source at this stage.
• Start-up Financing: Funds are used to further develop the company’s products and finance marketing efforts at a relatively early stage. The company may already have a sales track record. Provided a business meets the venture capital provider’s other criteria, a company exhibiting high growth opportunities may be able to attract funding at this stage.
• Early-Stage Funding: Financing is allocated to start commercial manufacturing and expand marketing efforts. Typically, the company has completed the development of products, but has yet to generate significant profits. The business may have secured smaller scale private equity financing at an earlier stage. This stage of business development attracts a reasonable proportion of venture capital.
• Expansion Capital: Money is allocated to finance the growth and development of an established company. Also referred to as “growth” or “development” capital. Funds may be used to increase production, develop new products, increase marketing or provide greater working capital. This stage is a major area of focus in the venture capital sector.
• Management Buy-Out (MBO): The funds provided enable current management to acquire a businesses at any stage of business development. The company itself may be private or public. Although the concept covers all company sizes, the deals themselves tend to be larger since they involve the acquisition of an entire business.
• Leveraged Buy-Out (LBO): Venture capital firms may provide funds in the context on a LBO, where the acquisition of a business is financed mainly by debt, with a small proportion of equity. The debt is secured on the business assets and serviced by the company’s cash flows. LBO targets are typically established companies with low existing financial leverage and substantial, stable cash flows.
• Secondary Purchase: The funds are used to buy out an existing private equity investor or other shareholders.
• Distressed Situation Investing: Venture capital providers may provide funds to finance a business in financial difficulty or rescue it from liquidation, provided a turnaround opportunity exists.

The end message is that, while certain stages of business development are more conducive to attracting venture capital, a company at any stage, and in any financial situation, may seek financing provided it targets the right venture capital firm and can present a compelling investment opportunity.