The Evolution Of Investment

While it would be great to launch your new business with a huge amount of invested money from others, that's rarely how businesses get started. Sure, you read about businesses in magazines getting millions in capital to launch a new idea, but you almost never read about what it took to get there.

The reality is that most businesses go through a slow process in both the state of the company and the ability to access capital. As the business goes from an idea to an actual business, the financing of the business becomes much more attractive.

In the early stages where you probably are now, the number of options available to you may be a little more limited. Here are the four typical stages of a startup company and the capital that tends to be available:

Idea Stage

Capital Types: Credit, Savings, Friends and Family
Revenue: None

Many entrepreneurs, in a moment of time envisioned a great idea and all of their thoughts start to form the foundation of a company.

This is the point where you're starting to put together what will eventually be your business plan. You're spending time writing down your ideas or doing research on the Web trying to figure out whether your idea is a good one.

Not much cash is required at this stage. This isn't a capital intensive part of the process.

This is usually the stage where you're still working another job to pay the bills and using your paycheck to cover expenses.

There may times when you may need to invest a small amount of money doing research, travel or some prototyping. This is usually the stage where you're still working another job to pay the bills and using your paycheck to cover expenses. It's probably a little too soon to be looking for capital because you're basically just funding early research.

Formation Stage

Capital Types: Small Business Loans, Angel Investors
Revenue: Less than $500,000

Now you've figured out what your business will to bring to market and you're ready to start building a business and providing products and services. Now you're on to incorporating the business, setting up your office, and getting ready to make your product available to customers and clients.

This is the most popular step and is where entrepreneurs raise capital because the costs start becoming much higher and few entrepreneurs have enough capital to do this alone.

There are many capital sources that specialize in this stage of starting a business, from SBA Bank Loans to private Angel Investors. You'll want to tap these sources for your first $25,000 - $500,000 worth of capital to potentially get the business launched on a bigger scale.

What you'll be selling to investors at this stage of the game is the potential of the idea, not the actual performance, since it's likely very beginning of the company. Investors will be investing in the idea and in you personally, more than anything.

Traction Stage

Capital Types: Lines of Credit, Factoring, Venture Capital
Revenue: Over $500,000

The Traction Stage of the business assumes you have already begun doing business and your business is ready for more capital. Ideally it's because your business is growing so quickly that you need to add more resources to grow even faster and to keep up with that growth.

Also it may be because the business is using cash than its earning and you need more capital to stay afloat.

In the Foundations Stage, the capital game changes a lot. Instead of selling the vision and the dream, you're now selling the actual results and outcomes of the company.

The capital game changes quite a bit in the Foundation Stage. Instead of selling the dream, you're now selling the performance of the company, which may be good or bad.

Revenues and cash flow start to matter at this point. You're no longer a startup and more of a small business that wants to be larger. Your sources of capital - Banks, Factoring Companies, and Venture Capitalists will be far more diligent about investigating the inner workings of your company and taking you to task on the accuracy of your financials.

Growth Stage

Capital Types: Venture Capital, Private Equity, Commercial Loans
Revenue: Over $3 million

As a business starts to generate real revenues an entirely new class of investment capital becomes available, all focused on fueling the growth of existing companies versus incubating ideas.

Think of these investors like a pro team versus a college team. When your business has done well enough to be eligible for large sums of venture capital it usually means you have proven to be a bankable athlete that is ready for a pro team.

You are now considered a company that is in the Growth Stage.

The investors you are talking to now are looking to invest much larger sums of capital to work, usually in the millions, and are looking for businesses that have a very real track record of success and growth.

The company at this point rarely still are pitching the big idea and usually has some real performance to back it up.

Investors at this stage are looking for high growth companies that they can latch onto and grow with. Think of these investors like the major leagues versus the farm teams. When your company has performed well enough to be eligible for large sums of investment capital it usually means you have proven to be a bankable athlete that is ready for prime time.

Summary

The reason for putting businesses into specific stages is to allow them to understand what capital types are best for them in that stage. There are always outside cases where a company will get Venture Capital funding with just an idea on a napkin, but those aren't realistic paths to follow.