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Types of private equity investment

Note that not every business will need to go through every stage of funding that is mentioned here.

If you would like to review what is meant by "Private Equity Funding" have a look at the factsheet on Funding a business.

Seed funding.

Seed funding is provided to develop a concept, create the initial product and carry out the first marketing efforts. A company is usually very young (around one year) and has not produced a product or service for commercial sale. The assembly of the key management team is in progress or has just taken place.

Seed capital is mostly provided by the founders, friends & family or angel investors. These early stage funds have become a primary source for emerging businesses needing to get started. Included within this is the possibility of founders securing bank loans, often against personal collateral.

First round

First round funding typically follows seed and early stage capital that was used to build the business' full-time management team, develop the business' first saleable product, and demonstrate that the business is very likely to be profitable. Normally this is where business angel or smaller venture capital funding takes place.

Before approaching funding sources the following should be completed:

  • Financial Analysis: Identifying all sources of revenue, assessing likely business costs, determining capital needs and modeling financial projections.
  • Market Research: Consisting of primary and secondary research to determine market size, market growth potential and other relevant factors.
  • Competitive Analysis: Identify relevant competitors and assess their strengths and weaknesses as an aid in determining underserved market needs and potential market demand for a new business' products and/or services.
  • Business Plan Development: Developing thorough, actionable plans for implementing your mission statement and, subsequently, turning a profit.

Second round

Second round funding is working capital for the initial expansions of a company that is producing and shipping, and has growing accounts receivable and inventories. Financing at this juncture strengthens the balance sheet and provides a solid base to solicit possible bank loans.

After a successful launch proves the viability of your business model, funds will be needed to further develop the marketing plan, hire more staff and management, and establish strategic alliances in the market. That third benchmark is often referred to as the second-stage, or the series B round. For purposes of talking to investors, the first round of external funds should generally be called series A and the second external round series B. This way, each subsequent round of external investors knows where they stand with respect to prior investors.

The key is to know your growth track, determine your sales and profit benchmarks, and be shrewd when it comes to valuing each stage.

Later stage

Later stage funding is normally for a company expecting to go public usually within a year. Often this funding is structured so that it can be repaid from proceeds of the public offering and non-included in any IPO (Initial Public Offering) sale restrictions.

Later stage funding investments are for companies with:

  • More than £10 million in gross revenue potential.
  • Large National or International market potential.
  • Management teams with successful track records.

Second, third and mezzanine financings are all considered "later-stage" and funded by venture capital investors and/or, in the case of mezzanine financing, can also include corporations, or "strategic" investors.

As in first-round financings, valuation is a function of the company's development to date relative to similar companies in the industry and relative to the last round of financing.

Mezzanine

Mezzanine funding, in a generic sense, is a venture capital term used to describe funding for a company that is somewhere between being a start-up and IPO. It can come in the form of stand-alone subordinate debt (the most common) or equity transactions.

This additional financial leverage can facilitate:

  • Mergers and acquisitions financing
  • An emerging growth opportunity
  • A management or other leveraged buyout
  • Corporate debt refinancing
  • Recapitalisation
  • Corporate restructuring

As subordinate debt, the rate and terms of mezzanine funding follows suit with the position it holds along the company's evolution. As late-stage venture capital, its position, in many cases, is amidst the final round of financing prior to an IPO. Committed at this level, it usually has less risk as well as less potential appreciation than at the start-up level. However, there is more risk with greater potential appreciation than in an IPO.

Additional help with investment

We have more information in our own resources pages, and of course you could join Company Partners and search for either Investors or investment opportunities.