Winner's Circle

Types Of Financing

Venture capitalists typically offer one of three types of early-stage financing: seed financing, research and development financing, or start-up financing.

Seed financing is generally given to entrepreneurs to help them prove that their invention or concept works. It's usually a small amount of money that pays for product development and market research. If the idea works, the venture capitalist will then consider providing start-up capital to further develop the project.

Research and development financing can be beneficial to both the inventor and the venture capitalist. This kind of financing has tax advantages if it's set up as product development financing. Venture capitalists can receive tax write-offs for their investments or a share of the future profits if the product is successful.

If you are far enough along that you have developed your idea and done some initial marketing, you should look for start-up financing. This type of financing is usually for a larger amount than the previous two types because the early stages have proved successful, and the venture capitalist feels his risk has been reduced.

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This article was originally published in the April 1998 print edition of Entrepreneur with the headline: Winner's Circle.

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