Securing Second- and Third-Round Venture Capital Financing
By Jim D. Ray
Widget sales are booming – the competition is scrambling, demand is up, and the
books are finally treading water. Your core management team has big ideas for the
future of Widget Inc. Opportunity is abundant; but how will you fund that next big
As your start-up matures, obtaining second- or even third-round funding may allow
your business to expand and grow into new opportunities identified after your business
was established. If your product or service has proven itself in the marketplace,
you may be a candidate for an additional round of funding.
Some possible uses of post start-up funding include:
- Penetration of new markets, either by industry or geographic location
- Development of new products or services that compliment your key lines of business
- Acquisition of competitors, staff and/or facility expansion, or new equipment
If your company is struggling to make ends meet, post start-up financing is not
an effective way to address red ink.
Consider other methods of debt management such as refinancing, streamlining systems
of production, and bootstrapping before looking for additional funding. Investors
will not be interested in extending additional funds to companies that have not
yet established themselves firmly in the marketplace.
Identifying Post Start-Up Funding Sources
The best source for post start-up funding may be your original investment partner.
However, sometimes asking your investor-partner for additional funds can be a lot
like asking your parents for a raise in your allowance. You’re going to have to
really prove a need for it, and even then, your original funding source may have
woke up on the wrong side of the financial plan.
Should this prove to be the case, there are additional sources to consider, including:
- Lending institutions (banks)
- Venture capital firms
- New private investors
- Other professional service providers within your core management team
If you developed a list of potential investment partners prior to start-up, renew
your contact with these individuals. By telephone or letter, convey the success
your product or service has experienced, as well as your purpose for the post start-up
funding. With a solid track record in hand, you may be surprised to find how many
potential second-round investment partners you have.
In addition, you’ll be in a stronger position during the negotiation process, meaning
you won’t have to give up as much control to achieve your desired result.
Tips For Maximizing Post Start-Up Funding
- Don’t commingle funds. Avoid falling into the trap of using new funds to
level the books. If you obtained additional funding for expansion, do not deviate
from the plan. Address any cash flow problems or existing debt service independently
from your company’s expansion needs.
- Learn from past mistakes. Undoubtedly, your company’s start-up phase was
a learning experience unlike any other. Recall the lessons learned from handling
your initial start-up capital. Now that you’ve established a strong working relationship,
call in your management team to gather additional opinions on the best way to disburse
funds on each project.
- Look for new opportunities along the way. As you implement your expansion
plan, be on the lookout for ways to streamline and maximize the results of your
efforts. Don’t be afraid to upgrade your plan; remember that your business plan
should be a "living" document, able to flex as the status of your market and the
general economy change.
Jim D. Ray is a seasoned entrepreneur and president of Web Presence, a national
web design firm exclusively serving the small business market sector.