A company (just like any other organization) should always try to live up to its full potential. Often times, in order to reach that potential, funding is needed. And almost always, one needs to ask for the funding by stating what issues the funds will address and how you'll go about resolving these issues (i.e. there's a demand for lemonade in the neighborhood and I'll invest $100 if you can supply the lemonade to meet that demand).
It's interesting how every organization has very specific funding needs to serve its purpose; $1,000 for Walmart really doesn't go as far as $1,000 for a local grocery store owner.
In high school, our National Honor Society had a budget of $500 for increasing involvement in the local community.
Early in college, I ran the social life of my fraternity with a budget of $5k and allocated an amount twice that size as part of my responsibility as recruitment chair.
Later in college, I allocated $100k to working with police and event professionals under my stint as Gator Growl Director of Security. My senior year, our team raised $20k to produce one of the biggest TEDx conferences in the world.
I'm not bringing these up to list accomplishments (let's be honest- none of these really matter in the "real world"). I am, however, demonstrating my point- different organizations have different resources to meet different goals and serve different functions. Companies are no different.
At my previous job, I was exposed to this idea in the form of venture capital (VC) funding rounds for companies in the tech sector. I was amazed by the various sizes of the funding rounds and the timeline of the rounds.
Before I started working, I had the following view of investment: company A raises $1 million from investor X. Company A proceeds to either (1) turn that $1 million into $100 million and it's a big success or (2) Company A crashes and burns and the investor never sees a dime.
As it turns out, this is not exactly how it goes.
The real-life way this plays out is Company A raises $1 million from investor X. Company A begins using that $1 million in a way that creates value. Creating value means increasing the valuation of the company. For example:
- Day 1: Investor X invests $1 million for 20% of the company = valuation of $5 million
- Day 365: Investor Y invests $1 million for 5% of the company = valuation of $20 million
Therefore, I realized that sophisticated investors don't expect (although they would prefer it) their first investment to take the company to IPO. They realize there are steps involved in building a company and reaching a certain scale, so their investment essentially says, "let's get started. We're here for the ride."
Another thing I learned is that there is a tiered hierarchy of investment rounds which goes in the following order from early to late (disclaimer: every startup has a unique way of approaching these, I'm just pointing out the full, traditional range of equity rounds)
- Early Angel Funding (aka The 3 F's... friends, family, and fools)- gets you started
- Late Angel Funding- this takes you from starting to going
- Series A Round- The first round from institutional investors (although some VCs focus only on seed stage in which case they will invest earlier) and usually ranges between $2-$15 million. The purpose of this round is to fully launch the product and begin marketing to reach customers. Given the investment amount in Series A, you're likely to see the VC appoint a board member to support management and supervise the investment.
- Series B Round- The second round from VCs. This round comes after the company has proven customers are interested in the product and the company has proven it has the ability to execute the marketing and operating aspects. The company needs more money to grow, and therefore this round can easily consist of amounts north of $10mm.
- Series C through Z- Further growth capital
- Initial Public Offering- the holy grail of Silicon Valley and arguably one of the least productive goals in the world, since there's no evidence that being publicly traded increases profitability in any way.
- Follow-On Offering- After a company goes public it sometimes chooses to issue more shares to the public.
Along any of the above steps, an investment can come from larger, late-stage investors known as Private Equity (PE) shops. These firms normally have a niche they like sticking to: early-stage, growth-capital, late-stage, leveraged-buyouts. VCs are considered a sub-sector of PE shops.
It's really a fascinating field, let me know if I missed anything or if you'd like to share your experience with investors and funding.