Stage 1: Seed and start-up
Seed capital funds the process that allows you to develop a prototype of your idea. Businesses at this stage have potential, but no sales, or have just begun to generate sales (start-ups).
Seed and start-up investors, such as business angels, expect to buy in to a business cheaply, as this stage is often high risk. Usually no proven sales track record and no real evidence the business or idea will succeed. Given the level of risk, an investor’s expectation for returns is high, around 80 – 100 percent per annum, often realised on a successful exit.
Capital for this stage comes from a variety of sources including personal savings, from friends and family, a bank, a business angel or a strategic alliance if looking to commercialise technology.
If your business is at seed of start-up stage, you should also consider development grants (especially if your product is technology based) or approaching organisations that will look at Stage 1 projects.
The New Zealand Venture Investment Fund’s (NZVIF) Seed Co-Investment Fund is aimed at high-growth businesses at the seed and start-up stages.
Find out more from the NZVIF
Stage 2: Early stage capital
Early stage investment is for investors that do not want the risk of the seed or start-up business. They are looking for slightly more mature businesses that may be marginally profitable. Often these businesses need money for marketing and distribution to become further established, and to commercialise ideas.
Banks are often wary about investing at this stage. Owners typically get Stage 2 capital from family and friends, business angels or through a joint venture.
Stage 3: Development capital
Development capital is for those businesses that need to further develop an idea, product or service. Working capital is needed to enter new markets or to bed down the business. Profits are reinvested and friends and family are no longer appropriate sources, as the money required is too great. Money at this stage usually comes from angel investors and venture capital firms.
Stage 4: Expansion capital
Investors who provide expansion capital seek businesses with a history of sales growth and profitability, and exceptional expansion opportunities. Venture capital firms will be interested along with larger companies and competitors.
At times you might find yourself going through all four stages, sometimes with different investors. You need to have a clear idea of how much capital you will need for the long term, not just the next 12 months.
Seek professional advice
Be realistic about how much money you will need and get professional advice to help estimate the amount.
