Finance

Companies start out at the idea stage, then progress to the start-up phase before they hit stages one through four. After stage four, they are generally public companies and go through an acquisition phase. Mature public companies sometimes go through one more stage, the leveraged buyout.

Money for the idea stage, also called the seed stage, generally comes from the entrepreneur and perhaps a few close associates. This is the giggle test stage. Can it be done? Can we do it? Is it worth doing?

Recently, in some hot areas like bio-med and high tech, some organizations have provided seed capital. Unless you have a tremendous idea or track record, don't bother to look for outside funding at this stage. Fortunately, the time and capital requirements for this stage are minimal in the beginning. Most entrepreneurs finance the idea stage from their regular paycheck and do the work nights and weekends. Others, like Andrew Klein, the securities lawyer who founded of Spring Street Brewery and Wit Capital, did the ground work for his Belgian-style beer company while on assignment in Belgium and Minneapolis, where the beer was brewed until the company died.

The start-up phase is the most tricky in the entire process. Not only is the entrepreneur completing his final marketing plans, but he is also scrambling for money, attempting to develop a manufacturable prototype, and, if he is smart, building a management team. This is when reality strikes. Does he want to leave the company that has been supporting him and his family to create his own company? This is also when a spouse’s support may dry up. The new idea is taking too much time to be a part time hobby. If the entrepreneur leaves the company, there goes the retirement plan, the health insurance plan, the regular pay check. And here comes dipping into savings, selling stocks, borrowing against the life insurance policy, taking out a second mortgage and asking friends and family for money.

Since the spouse certainly has a stake, in some states it is a legal stake, this is the time to really talk about what you hope to accomplish , what the risks are and how long you are going to give it, what milestones should be achieved so you know that the company is viable.

At stage one, a company needs money to begin production and marketing. This is where outside funding becomes not only necessary, but possible. However, bank financing is problematical. Banks will loan on new equipment using the equipment as collateral, but most are not comfortable funding a marketing program unless there are assets to pledge. A Direct Public Offering may make sense at this point.

A stage two company is growing, but probably hasn't shown a profit yet. The company needs funds to build inventory, carry it until the receivables come in and for marketing.  Money can be borrowed against its inventory and its receivables.  Receivables can be sold (factored) and inventory can be financed through a chattel mortgage. Selling equity is a good option.

Not all successful companies reach stage three. At this stage, the company needs money for a large expansion. Although sales are growing rapidly and the company is making money, a stage three company may not find a bank willing to fund the expansion. This is because a rapidly growing company may not be showing a profit, which raised questions about its ability to repay the loan, even if revenues are climbing.  This is a classic opportunity to sell equity. 

 In the case of a fast growing company, past financials, even last month's might not prove that the company's future revenues would support the size loan it needs to fund stepped up marketing, increasing production and additional working capital.

Of those which reach stage three, not all opt for stage four which is the mezzanine or the bridge stage. Companies getting ready to do an initial public offering seek stage four financing to get their balance sheets in order, to buy out existing stockholders, and to pay the up front costs of the IPO. From this point, further expansion is usually funded by additional public offerings of either stock or debt.

An exception to that statement could be acquisition financing. In a large acquisition or a merger, the company may issue stock to the owners of the purchased companies.

In a leveraged buyout, the acquiring company believes the pars of the company are worth more than the whole company's market value (the total of all outstanding stock times the price of that stock). This type of purchase is accomplished through debt, either bank debt or the issuance of bonds. The debt is paid off as corporate assets are sold. Ideally, the buyers end up with the company's core business and a healthy supply of working capital. Sometimes the company is liquidated.