Early stage venture capital: everything you should know about

Photo of one of the offices of our early stage venture capital firm
Wondering what early stage venture capital (VC) is or want to know more about how you can secure early stage startup funding? In this article we'll go over the need-to-knows about early stage VC; pre-seed, seed & series A funding and how you can prepare to pitch to investors. We’ll point out some noteworthy early stage challenges, opportunities and risks. Early stage funding is not easy to acquire, but understanding the process will help when growing the business.

What is an early stage company?

The common definition of early stage company is pretty simple. Early stage companies are defined as having tested their prototypes, refined their service model and prepared the business plan. Some early stage startups might be making early stage revenue, but are usually not profitable yet.

In other words, an early stage company has a newly developed business model to address at least one market pain point. This means that the company has not matured in the process yet. The business is still at phase one, the startup phase.

In phase one, we focus on finalising our products or services. This is based on the market data we gathered. Before we can move to stage two of growing the company, we'll need funding. We call this seed funding or just seeding. The seeding process involved gaining the early stage venture capital you need to further develop your business.

After the pre-seed and seed round, series A financing is one of the funding rounds an early stage startup will encounter. By this point, the startup is showing promising growth potential and has achieved great milestones in the process of becoming a well-established business. Many investors see series A funding as the first stage of venture capital financing. During this stage, the startup can secure a great deal of venture capital funding to keep developing the business.

As an early stage startup, you'll have to be prepared to put in hard work to convince investors that your business model will generate ROI. It's risky business investing in early stage companies.

When preparing your pitch to possible investors, clearly state the following:

1. What's the specific market problem you're solving?

2. Who's your primary target market? (Identify their unique characteristics, behaviours and psychographics).

3. What makes you inherently different from competitions?

4. What type of investments do you need and why? (What are you going to use the funding for).

5. Have you, or how will you, test the success of your business idea?

What is the Difference between an Early Stage and a Late Stage Startup?

We've introduced you to the concept of an early stage startup, so you might be wondering what a late stage startup is?

There's different rounds involved in the process of becoming an established company. Let's break them down into six stages:

1. Pre-seed Stage: You're building your business model and collecting research to support your request to early stage VC investors.

2. Seed or Startup Stage: Now you're making your business model more credible by filling in the details.

3. Series A funding: When a startup reaches this stage, they’re already signaling positive business growth

4. Growth Stage: Your product or service is in its final version and is evolving in the market.

5. Maturing Stage: You're seeing growth in terms of new customers, returning customers and revenue gain.

6. Expansion or Exit Stage: You either decide to scale your business or focus on high market value and long-term ROI.

If we go according to these stages, late stage startups will have grown past the early stage funding rounds, meaning that the pre-seed, seed and series A rounds are complete. This means you've already proven that you have an actionable concept, you've clearly identified your market space and you've shown the statistics that there's market traction towards your product or service.

A late stage startup can provide clear evidence of their viability. By now, the company has reached a certain level of maturity and is either profitable or can demonstrate growth and revenue.

In the later stages, you'll probably want higher investments from venture capitalists. This also means that investors will have higher expectations in terms of your performance. You'll need to provide evidence that you're meeting your goals and making wise investments.

Understanding early stage companies challenges

Starting is very brave, but also risky. Being aware of the challenges that might come your way will help you to be proactive in planning how you'll deal with the risks. It's always important to remember that you should identify the opportunities you can leverage to face challenges early, instead of letting them build-up.

It's already challenging to get funding or even to just gain venture capitalists' awareness. There’s thousands of new startups debuting every year. Of course not all of them are successful. Although, the ones that do make it probably had an action plan ready for making it past the challenges.

Here are six of the most common early stage company challenges:

1. From vision to reality

Startup founders are great visionaries. They can brainstorm and plan a fantastic business concept and see how future success is generated. They have greatly optimistic attitudes, which is a beneficial characteristic to have in business. However, visionaries run the risk of turning a blind-eye on the challenges of reality.

This is why you should always do the research that protects you from running into challenges you could have avoided in the first place. Be aware of industry regulations and requirements and establish a team that perhaps has deeper experience or advice on building a business in the real world.

2. Securing funding

This one is probably obvious, we've all probably heard "it takes money to make money". This is definitely true for startups and early stage companies. Although your funds may be limited early on, no money doesn't mean that your business model isn't successful.

Early stage investment companies invest in early stage startups when they are convinced that the business model is actionable and will result in revenue growth, plus generate ROI.

This is why it is critical to work with investors, business partners, consultants, mentors, etc., who are concerned with your long-term success. It's important that you build these connections and get their advice on funding strategies.

3. Meeting expectations

Early stage investment firms are not easy to convince. Just because they specialise in early stage VC doesn't mean they will certainly invest in you. After you pitch to them, you'll likely be met with a lot of questions.

Since the risk of investing in early stage startups is a lot higher than investing in later stage startups, meeting expectations is going to take a lot of effort and patience. You'll have to show your credibility and viability and continuously reinforce your long-term success.

The more research and growth statistics you're able to show investors, the better. Remember, data is power.

4. Securing customers

You might have secured early stage funding, but securing customers is another level of difficult. These days, consumers are exposed to hundreds and thousands of brands each day. Eventually, we start shutting down and blocking out new brands and focus on those we're loyal to because we're overwhelmed with so much "new".

You need to be determined in winning recognition. One way of gaining market visibility is by heavily focusing on your niche and distributing your marketing efforts in this area, until the market starts paying attention to you. Start in a small pool and establish your authority.

5. Building trust

Again, growth statistics and data will help build trustworthiness, investors love numbers. Your personality is also important when working on a trustworthy reputation. Your brand, board members and you need to appeal to prospective customers and stakeholders. Building trust and loyalty is part of the most difficult things to do as a startup, for good reason.

6. The competition

Competition is aggressive and early stage startup funding doesn't come easy with the amount of proposals a single early stage financing firm can receive. You have to be fierce to strengthen your market position and to grow your business.

This means continually working on reaching out to potential customers and investors and really developing your marketing strategy. You want to gain a lot of visibility and draw attention to your company. This can happen by building relationships with journalists and utilising Social Media as a start-up.

Word-of-mouth is extremely powerful to have as an early stage company, so encourage people to share your news!

What is early stage capital?

It may sound overwhelming trying to secure early stage VC funds. But, everyone has to start somewhere. Before you start generating a positive cash flow (late stage startup), you need early stage investing.

The definition of early stage capital says that early stage capital is collected with the purpose of supporting the development of the startup company's products or services. These funds can also be used for initial marketing and manufacturing of your products and/or services.

Funding is more easily secured when you can prove to your possible investors that the business model holds great reward against reduced risks. Since this is likely the first time investors are involved in the business (seed funding), they will be purchasing a share in equity, stocks or convertible notes.

Early stage funding for startups usually requires venture capitalists to make a large investment. This is because product or service development needs a large sum of capital to operationalise. Due to this, most startups break up their seed funding into smaller series.

By having a small series of early startup funding rounds, investors don't have to give out a large sum of capital all at once. This lowers the risk for them and you gain the capital you need to move a step forward.

Early stage capital mostly covers all the investments a startup needs to start generating positive and continuous revenue. It's important that you make sure you are able to maintain and sustainably manage these investments.

Investing in early stage: Advantages and disadvantages

Early stage funding for startups is associated with many risks and rewards. This is because the nature of startup investments is so inherently different from that of traditional investments. Before engaging in early stage funding, deeply measure the advantages against the disadvantages.

Advantages of investing in early stage startups

It’s understandable that investors are skeptical about investing in alternative assets, like startups, since there’s a greater margin for error. It also takes longer to see a return on investment and profits. However, investing in early stage startups offers investors opportunities that the stock-market cannot.

1. Fresh innovation

Startups bring a refreshing mindset to the industry. Since new technology advancements now touch almost every sector of every industry, it's worth spending some time to look at which newcomers have the business model to innovate their niche.

By investing in the next generation of business, you're creating a new horizon that makes innovation and alternative thinking more possible. Investing in alternative assets may take a small percentage of your investment portfolio, however can yield big results from one inventive business idea.

New companies are usually founded by ambitious thinkers, meaning that your advice as an investor will also be welcomed.

2. High reward

Early stage investing is not for everyone. It requires a strong business mind and the ability to forecast the future viability of an early stage company or startup. You also need to be prepared to possibly suffer unforeseen loss, but the right choice can lead to great reward.

However, scrutinizing the startup funding process will help you acquire profit returns, plus additional profits in the long run. You effectively minimise your risk by investing in promising startups. Although you don't have hard profit statistics yet, the business model will show if your investment is going to result in high reward once the company grows.

3. Future Wealth

To get the maximum returns, you have to adopt a long-term mindset. You're basically securing future prosperity through investing early stage VC funds. By doing so, you're also indirectly promoting the evolution of the industry you're contributing towards. Creating more room for new investment opportunities in a growing market.

Next to this, investing in startups or participating in early stage funding rounds gives you the opportunity to be more involved with the company's process, from an investment point of view.

This means you are likely more aware of how the funding is being used, offering you more security about the status of your investment.

Disadvantages of investing in early stage startups

We’re not oblivious to the fact that early startup funding is accompanied by funding risks, since investments are based on speculative statistics. However, being aware of possible risks helps you to make insightful decisions before committing to the wrong investment.

1. Valuation risk

Unlike public trade companies, who are valued publicly through market driven stock prices, startups are more difficult to assess. Since you're most likely investing in company shares, there's always the risk of overpaying. This is because early stage companies need a great sum of capital to develop the business products or services further.

It may take you longer to see your investment generate positive results back to you, so be mindful about what you're willing to pay and if your share will become more valuable in the long run. Also, take the time to understand the security instrument you're investing in.

2. Return risk

There's always the question of "will the company make revenue?", "can they guarantee returns?". If your answer is uncertain, then rather evaluate your other investment opportunities. With most startups, the amount of return on investment is highly variable and not certainly guaranteed.

There's also the possibility of returns delay. It can take years for startups's returns to materialise. If you need to see fast returns in a certain timeframe, then rather don't invest. With startup investing you need to be flexible and aware of the fact that it's not a quick cash option.

3. Growth risk

Large expansions are needed for startup success. The level of expansion is also highly dependent on the quality of management and financial resources. Before investing, ask questions about growth management and the processes or planning that's in place for expansion.

Assurance about if the company's current and planned control systems can support future growth is speculative. If you cannot afford to make a loss, then rather wait for the company to mature and reevaluate your investment opportunity. Late stage investing does provide more certainty.

Despite the risks, if you're willing to face the inherent prospects of early stage startup funding, the rewards can be significant.

How Volta does early stage investing

At Volta, we understand that there’s a million different ways to start a business. For us, it’s the journey that matters. As one of the top early stage VC firms, our experiences have taught us that it’s important to work fast and flexible, while guiding you to find your own way.

We’re not just an early stage venture capital firm. We’re your sidekick who supports you in gaining access to new markets, new clients and customers, funding and other networks you can use to scale and grow your business.

We know that securing early stage venture capital is difficult enough, so we want to make the process that follows as smooth sailing as possible for you. We see the positive contributions startups, entrepreneurs and new companies make to benefit their industries and communities.

That's why we choose to invest in early stage startups. Early stage VC funds can be used to help startups and new companies succeed along their journey of adding value to their niche or the larger market. We help you to grow your business to deliver the best possible service to your clients and customers.

If it's networking opportunities or securing funding, we're by your side. Many times, early stage investment companies are only concerned with how you're going to generate a profit for them. We're more concerned with how we can help you to expand your business, so that you and your stakeholders can celebrate long-term success.

Conclusion

Hopefully this brief overview has helped you to better understand the early stage venture capital scene. When applying for early stage financing, always remember to be clear and concise about your business model. Investors want to see the research and planning you've

done to prove the validity of future success. The more data you can provide, the lower the risks of investing becomes and the advantages of your concept becomes more visible.

When you are aware of the challenges you might face, you can also proactively plan how to deal with hurdles.

If you’d like to know more about early stage funding, or if you’re interested in working with an early stage venture capital firm, contact us today.

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Venture Capital Fund

Belgium

Gebroeders Vandeveldestraat 68, 9000 Gent

The Netherlands

Herengracht 236, 1016 BT Amsterdam
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