Describe and compare early-stage financing to expansion or development financing. Who are the usual investors in each of the two stages?

Question

What will be an ideal response?

Answer 1

Early-stage financing is usually the most difficult and costly to obtain. Two types of financing are available during this stage: seed capital and start-up capital. Of the two, seed capital is the most difficult financing to obtain and is usually a relatively small amount of capital needed for proof of concept and market feasibility studies. Start-up financing is involved in developing and selling some initial products to determine if commercial sales are feasible. These funds are also difficult to obtain. Angel investors, family, and friends are often the source of funds in these two types of financing.

Expansion or development financing is easier to obtain than early-stage financing. Venture capitalists play an active role in providing funds at this stage. As the firm develops, the funds for expansion are less costly. Generally, funds in the second stage are used as working capital to support initial growth. In the third stage, the company has a positive cash flow and profit and needs the funds for major sales expansion. Funds in the fourth stage are usually used to bridge financing in the interim period as the company prepares to go public or be purchased.