Venture capital investment is needed to raise third-party capital for a promising startup, financing rapid growth. The investment allows either the development of a new product/idea (early stage) or the rapid growth of an existing business (later stage/growth stage). Such investments are considered risky, but the risk of such projects justifies the expectation of super profits, which in the case of venture capital investment exceeds the amount invested many times over. To minimize risks and streamline investments, the process of financing a project through venture capital funds usually is divided into several stages.
This is a very early investment, the first necessary stage to prove new ideas. Seed funding helps start-ups become fully operational. At his stage, the start-up company has a concept, an idea for a product, but no finished product. Investors can be venture capitalists, angel investors, accredited investors, equity crowdfunding investors, revenue-based financing lenders, or government programs.
Investments for the early-stage companies having a pilot version of the product or the first version for demonstration; the product becomes tested. Typically, early-stage companies need funding for marketing and product development expenses.
The company transforms itself into a large organization, showing the features of a public company.
Depending on the type of company, e.g. SaaS or Deep-Tech, both the number of rounds as well as the round designations will be different. A Deep-Tech startup will require substantially more rounds before becoming profitable, as compared to the average SaaS company (hence the preference for many of the VCs to invest in software rather than in hardware).
Image credits: Startup Financing Cycle By Kmuehmel
One of the challenges that comes with design services is the cyclical nature of the services business. When the economy tightens and corporates are watching their operational expenses, the first step will be to halt any external contracts/contractors which are not deemed absolutely essential.
Whereas the earlier (staircase) model is a good approach in scaling up revenue and creating new revenue streams, the foundation of the company is still based on the service model: headcount continues to be the main driver (typically up to 60-70% of revenue). In terms of (enterprise) valuation the additional revenue streams, however, will already make a significant difference.
Design services companies typically start small (some exceptions when it concerns management buy-outs) and natural growth is a slow process as it requires hiring and training of engineers based on/driven by the revenue stream of the company. Growth of business is tied to growing the team and it is not always easy to find the engineers.