To be effective in raising venture financing you have to know where the investor commits their capital, including what business stage they invest in. Stage of business development is defined by use of funds and falls into three categories.

• Seed and Start-Up Financing (up to US$500,000): Seed capital enables a business concept to be developed and may be used to finalize a business plan, conduct research and develop prototypes. Start-up funds are applied to further develop products and commence marketing. Other early stage funding may finance commercial manufacturing and sales for a company which has completed product development but is not yet profitable.
• Development or Expansion Financing (US$500,000 – US$5 million+): Capital is used to fund the growth of an existing business. Uses include increasing production capabilities, further product development, enhanced marketing, or financing a larger working capital base. Company may or may not be profitable at time of investment.
• Buy-Out or Acquisition Financing (US2 million+): Includes management buy-outs (MBO’s) to allow management to acquire the business they manage, management buy-ins (MBI’s) where a management team acquires an outside business, and institutional buy-outs (IBO’s), where the investor acquires the company and subsequently allows existing or incoming management to participate in ownership. A separate category is leveraged buy-outs (LBO’s) in which the vast majority of the purchase price is financed through debt.

Some venture capital firms specialize in turnaround situations for companies in financial distress or offer bridge financing where funds are provided on a temporary basis prior to an imminent IPO.

Your business will be better positioned to raise venture capital if you target investors with the most interest. Evaluate how much capital the company needs and what the funds will be used for and make sure there is a match with your potential investor’s criteria.