Raising Capital in Stages
When you start your company, you may end up having to give away a healthy portion of your company in exchange for little money because you have nothing more than a good idea. As your successes grow, however, you will be able to justify a higher price for the equity of your company. This is why young companies should raise capital in stages and accomplish certain goals with the money they raise.
/ Figure 3.4: SELLING IN STAGES
An inventor came to an investor with a great idea for some software that would also be a video game. For this venture, the inventor needed to write and build the software, test market it, adapt the software to the video game formats that are out there, and finally, manufacture, market, and distribute the software. To accomplish these goals, it would take quite a chunk of money, so the investor broke it down: raise some capital to write and build the software. Raise more capital to test market and adapt the software to video game software formats. Then, raise some final capital to manufacture, market, and distribute the whole thing.
All along the way, the successes of the company justified higher share prices for each of the three rounds of capital raising. Consequently, the company ended up selling off less of its equity than if it had tried to raise it all at once.