"Africa is the only developing region in the world where the growth rate is expected to rise this year. Internet usage has  grown more this year in Africa than on any other continent......in short, Africa is on its way. " - Hillary Clinton on DEMO Africa 2012.

We have already covered what venture capital is in part 1. Now let’s start looking at the process of venture capital financing and just what to expect going into this dark, enigmatic world. Early stage funding is the first stage of Venture capital financing a start-up undergoes. It refers to the initial injection of funding based on economic viability and proof that the business idea is lucrative.

This can be done in many ways, among them sales figures for businesses whose design is sales-based or performance indices for ideas whose scheme is company performance. Such measures make it easier to gauge the business ideas against their counterparts in the market and check whether they meet or outperform the industry benchmark.

It is crucial for a start-up to make horizontal comparisons to establish their business case and prove that their concept is viable. This is because the VCs are taking a risk that the concept will realize income upon entry into the market and that some returns will be satisfactory.  Most start-ups fail in this stage and investors face low returns on investment due to poor management and failure to meet objectives. Here’s a breakdown of what the early-stage financing involves.

1. Seed financing: The purposes of this source of financing include;

• Salary support – Payment of management staff, other employees and researchers.
• Research & Development – Further probing into the viability of the business idea and whether a prototype is practical.
• Market and customer base research – This covers launch of the product or service, and research into the consumer preferences.

Sources of capital in this stage include family donations, personal funds and donations from friends. Credibility is very important at this stage since proof of sales or performance may not be substantive enough to approach VCs later for the financing needs.

As such, a monetary value is attached to one’s trustworthiness and investor’s goodwill. It is up to the founder to put together a committed team that will help in achievement of objectives that will allow them to move to the next stage of financing. The general intention of the seed round is establish viability and sustainability.

2. First-round financing: This refers to the ventures first cash injection from external sources. It makes for a good source once the business proves steady growth once market has been identified and required staff is in place.

This round is generally sourced from VCs or Angel investors. The latter refer to wealthy individuals who partake in invest in start-ups. This form of fundraising occurs over a period of time (from a few weeks to several months) with the aim of boosting their financial and capital goods base. Equity is by and large taken up by the VC in the form of preferred stock.

This is the second instalment of a 4-part series covering financing for business start-ups. The range of information provided will cover what Venture Capitalism and the different stages of financing for a business whether in its early stage or expansion stage.