What are the stages of Venture Capital?
There are 5 stages of venture capital: Angel, Seed, Follow-on, Mezzanine, and Bridge Loans. The assumption is that valuation will increase through each stage and risk will decrease.
Angel Stage: Primarily friends and family members
Seed Stage (or 1st Round): First investment by professional investors
Follow on Stages (Rounds 2-x): More rounds of professional money
Mezzanine Stage: Last expected round before an IPO
Bridge Loans: Money that is loaned with the expectation of converting into equity at the next round of financing, usually with a discount to the per share price
For any company, a drop in valuation between rounds is disastrous. When valuations do not increase, it means that the management team did not execute according to plan. This also means that future investors will be less likely to invest, given that the potential of the company is now in doubt. A fair valuation at each round is critical. If you get too much in one round, you will be in a far worse situation with follow-on funding. Thus, it is important to get a fair valuation for your company at each stage.