Another resource is N. Humphrey's Venture Capital Guide, published by Gilbert and Tobin (2000). The following information from OzNetLaw is based on Humphrey:
1. What is venture capital?
Venture capital involves funding high growth private start-up companies, particularly in the information technology and e-business industries. Venture capital offers medium term equity finance and does not require regular interest payments. Venture capital can provide a number of value added services include mentoring and the introduction of strategic alliances.
Venture capitalists (high net worth individuals or companies who provide the capital) generally take a minority share in the company and usually do not seek day to day control of a business. They generally appoint a representative to the board of directors and require input and in many cases retain veto rights over key strategic decisions.
2. Stages Of Growth
Venture capitalists categorise companies into four stages of growth:
(a) Stage one—Seed: the business is little more than a concept, the product is in development and the company is concentrating on research and producing a working model or prototype. The founders will fund the business from personal funds, typically requiring between $50,000 to $500,000.
(b) Stage two—Start-up: known as the "Angel round", the concept or products have been developed but the company has no track record and often has not made a profit, thereby making more traditional funding difficult to obtain. This is the riskiest stage for investors. The company needs a large amount of capital (typically between $500,000 to $2 million) but has no reliable indicators of its future success. Many businesses fail during this phase.
(c) Stage three—Expansion: known as the "second round" and may comprise multiple rounds before stage four. The company is fully set up, has usually received some funding and is building a financial track record. The company however, needs further funding (typically between $2 million to $10 million plus) to expand existing operational and marketing capacity. Some companies choose to meet financing needs with traditional bank finance (note that a bank will usually require personal guarantees from directors together with collateral).
(d) Stage four—Mezzanine: known as pre-Initial Public Offering (IPO) funding (typically between $10 million and $50 million and up). Funds are used to prepare for IPO including strategic acquisitions. Mezzanine investors may provide experience in the IPO process; for example, the company is "dressed up" for listing by introducing recognised business people to the board.