The Funding Process

Getting to the place where you can seek VC money is no easy feat. And once you are there, you enter into a rarefied, specialized business world with a nomenclature all its own. For instance, in this world the money you got from your parents is not called “the bank of mom and dad”; rather it is “seed round” funding. The point where an angel may wish to invest in your business is called, not surprisingly, the “angel round” of funding.

After that, you may be ready for even more funding, for “series” funding. You know you are there if your business, while successful, still requires even more money for the idea to really fly. It could be for marketing, or product development, or hiring staff to ramp up, or inventory—anything, really. Whatever the case, at that point, venture capital money is needed. Yes, there are those few businesses that get VC money far earlier than this, that go from seed round to VC round, but they are more the exception than the rule. The VC round has several subrounds.

The Series A Round. If a VC firm likes the business, it will offer the entrepreneurs a “term sheet” (see Chapter 7, “Angel Investors”). The term sheet will outline the terms of any eventual deal and will lock the startup up; that is, while the VC does its due diligence and investigates the business and opportunity, the entrepreneurs are forbidden from pitching to any additional VC firms.

Once the due diligence is completed (one to two months) and the deal is a go, the venture ...

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