Staged Financing
Businesses require funding at various stages. It is significant for a business to be well funded to ensure its sustainability in the ventured industry. Business ideas meant for research purposes are usually funded at the seed financing stage. Funding involved in the transformation of the ideas into operations of a company is funded at startup financing. For the businesses at the stage of revenue generation, the funding is early-stage funding. Replacement funding occurs when the business has expanded and seeks to diversify investment. Finally, vulture financing is a business saving funding in a company facing failure (Senalasari et al., 2019, p.7589-90 ). All these stages involve high risk as the person/people involved in the funding are not sure of the outcome.
Investors
Investors provide their input with the expectation of returns. However, there is risk in the investment as there is no sure way of predicting what might happen to a business in a given amount of time. The application of both non-contractual and contractual means of mitigation concerning agency risks vary across states (Bellavitis et al., 2017). It is further explained that investors may have good returns upon participating in stage funding by nurturing relationships with entrepreneurs and managers. Investors use staged financing for risk alleviation.
Entrepreneurs
Stage financing is quite significant for entrepreneurs. A startup company would require financing throughout the development of the company and stage financing plays a major role in this. With low output for an entrepreneur at an early stage, it is a determinant for the entrepreneur as to whether to move on with the project or not (“(PDF) Staged investments in entrepreneurial financing,” 2011). Suppose the capital investor gets stuck while still in the process of establishing the business foundation. In that case, the entrepreneur decides to determine whether to be patient with the VC or sign up a new one. Therefore, stage financing plays a significant role for both the entrepreneur and the investor, ensuring the business’s positive growth; otherwise, sound decisions have to be made for both parties, ensuring it is a win-win situation.
References
(PDF) Staged investments in entrepreneurial financing. (2011, September 11). ResearchGate. Retrieved October 14, 2020, from https://www.researchgate.net/publication/228137777_Staged_Investments_in_Entrepreneurial_Financing
Bellavitis, C., Kamuriwo, D. S., & Hommel, U. (2017). Mitigating agency risk between investors and ventures’ managers. Journal of General Management, 43(1), 33-43. https://doi.org/10.1177/0306307017722937
Senalasari, W., Dalimunthe, Z., & Triono, R. A. (2019, January). Staged Financing: Case Study Indonesian’s Startups. In 33rd International Business Information Management Association Conference: Education Excellence and Innovation Management through Vision 2020, IBIMA 2019 (pp. 7588-7593). International Business Information Management Association, IBIMA.