How Company Stage and Business Model Impact Capital Choices
Valency Fund Mission
As part of our introduction to Valency Fund, I’ve shared my journey from founder to funder. As a reminder, our fund began with the perspective that Wisconsin has a rich tradition of building sustainable, profitable companies that create tremendous value over time. The opportunity we saw is for complementary investment options that catalyze this type of growth alongside established funding sources, including equity investors and debt providers. Being place-based rather than industry focused allows us to leverage our networks in the state to drive our pipeline as well as provide resources for our companies to succeed.
Our initial investment focus is on early growth stage companies with strong fundamentals and near term potential to be a sustainable, cash-flow positive business. These companies may already have or be preparing for an equity investment or may be growing without that type of capital. In addition to our investment, Valency Fund wants to raise awareness for early and growth stage companies about potential capital sources. Seeing the landscape of options allows companies to prepare in advance and be in the best position to seek out the type of capital the company needs. As part of these efforts, we’re sharing some of our thoughts about the types of capital a business may need and when.
Business Stages
While every business is unique, there are some general actions that companies need to tackle to start and grow. In addition to the product or service sold, the business model is a critical component for even the earliest companies. A good model should include the value proposition, markets, revenue, costs, and more. Some, or even all, of this information will be assumptions in the early stages, and your model should be updated as you get information that challenges or supports assumptions.
Company stages diagram showing traction and revenue growth over time across early, growth, and late stages with key activities at each phase
As an example, customer feedback that pricing is too high could result in improvements in distribution and production efficiency to increase margin or pursuit of a different customer base that puts more value in the product/service and will pay higher prices. These learnings are what allow a company to grow to predictable revenue and successfully scale the business. When business model changes are significant enough, a refresh of your plan can help determine whether the company activities are still on the right track or if there are better opportunities to pursue.
Financing Aligned with Business Stage
Determining how to fund your business is a result of understanding your stage AND your business model. Often diagrams of funding stages like the one below are based on investor stages, but your business model should be the driver of relevant sources of capital.
Funding sources chart showing when different capital types are relevant across early, growth, and late business stages based on company maturity
While FOUNDERS AND FAMILY and friends may get paid back, repayment of that capital often has the most flexible investment terms.
When possible, using REVENUE to invest in business growth is the least disruptive (e.g., doesn’t change ownership or require repayment).
GRANTS are also flexible capital, but often focus on early stage opportunities.
If the business model matches investor expectations, EQUITY INVESTMENT (angels and venture capital) is available through much of a company’s journey.
DEBT is generally thought about at a later stage because it requires the company to have enough revenue/stability to repay the obligation.
Some forms of DEBT can come at somewhat earlier stages, such as revenue-based loans, lines of credit for working capital, venture debt, and some Small Business Administration loans.
Risk:Reward by Investor Type
Investors correlate return on investment with the risk their capital is taking. Early stage equity investors (venture capitalists and angels) expect the greatest returns because they take the greatest risk. While the risk shown below is “Investment Risk”, there are different kinds of risk over the course of a company’s lifespan (see Company Stages above). At the beginning of a company, almost everything is a risk: operations, talent, strategy, technology, market, global economy.
Risk and reward chart showing investment types from senior debt (lowest risk, lowest return) to early stage venture capital (highest risk, highest return)
A company’s risk profile is different at each stage of potential investment. For example, there may be a decreased technology or market risk after sales increase that is followed by an increased risk of not being able to scale. As debt comes into the picture, the business-specific risks are lower, but there are other considerations that protect those investors. Loans are structured to start to return capital right away and generally come with some form of collateral for protection in the case they don’t get paid.
Although the investment types are shown separately in the figure above, they can be synergistic. For example, some forms of debt can be leveraged for a company to strengthen their position before or after raising additional venture capital.
Risk:Reward and Your Business Model
Here are a few things to consider when exploring how your business model aligns with various investor expectations.
How Do Investors Get a Return?
There are a variety of debt providers, ranging from traditional banks at the later stages to venture debt somewhat earlier. In general, these investments are structured similar to loans we see in our personal lives. The lender expects a certain percentage return on capital over a mutually established timeline. A more established business can get better loan terms because the risk is lower, mirroring personal credit scores. This description is an oversimplification, and we’ll cover more nuances of various debt instruments in an upcoming post.
Equity investors take on an additional risk by having their capital returned only through the sale of their ownership stake in the business. The earlier the investment, the longer the company is likely to take to exit their investors. When considering venture capital, there is a distinction between a VC firm (a management company) and a VC fund (a pool of capital from Limited Partners that is managed by the VC firm). The firm generally has a great name and brand while the fund includes the firm name along with a number.
A VC fund traditionally has a 10 year lifecycle with roughly 3-5 years of investing capital into portfolio companies and 5-7 years of capital returning to the fund. The end result is a “J” shaped curve (orange below) where the capital out of the fund is greater than the returns for some period of time. Taking equity investment is a commitment to work towards a sale of the company during the fund lifecycle. The success of their portfolio companies is how a venture fund returns money to their investors (Limited Partners) and determines how easily the VC firm can raise their next fund. (Angel investors typically invest on their own or as part of a group, but they have similar exit expectations.)
VC fund lifecycle chart showing J-curve pattern where capital is invested over first 3-5 years (bars below zero) and returned over remaining 5-7 years (bars above zero) within a 10-year fund lifecycle
What Do Investors Expect for a Return?
As noted above, lenders are typically expecting a set interest rate as their return, and the rate is established based on risk calculations as well as other factors. The term (repayment period) of a loan is one of those factors and gets negotiated along with the interest rate. Equity investors look for ~3x (or greater!) return across an entire fund. Given all the risks a company has at the time of VC investment, these investors are betting that the sale of 20% of their investments will drive the majority of their returns, which is why you hear about the need for a potential 10x or 100x return to be a good fit for VC.
What about the rest of the venture fund investments? The curves below are one way to frame the answer. Due to the significant risks inherent in their investments, VCs are counting on one (maybe a few) massive outcome (e.g., 10-100x), which means the majority of the investments will be a total loss or just break even. That profile is in contrast to other investment types where the risk of either end is lower and outcomes are generally expected to be more similar across the investment portfolio. (These curves are illustrative, not based on specific investment portfolios!)
Range of outcomes chart showing distribution curves for secured debt, hybrid debt/equity, and venture capital investments, illustrating how higher risk leads to broader outcome distribution
Here’s a recap of the outcome estimates.
Secured debt → Very narrow outcomes (highly predictable, low risk)
Hybrid debt/equity → Moderate range (some downside risk with more predictable, moderate upside)
Venture capital → Extremely wide distribution (most are total loss with a few winners delivering returns)
What about YOUR Business Model?
Depending on your business model, venture capital may be the best way to scale rapidly for a large market or to develop technology that requires significant upfront investment. The business model for a venture-backed company should support a 10x to 100x exit in less than 10 years. Achieving that goal often comes with significant expectations for rate of growth and additional capital raises.
If your business model isn’t the best fit for venture funding (even if you may be in the future!), we’ll be covering more on the other funding sources over the next few posts.
Capital That Fits
At Valency Fund, we’re interested in answering the question: what kinds of capital can catalyze growth for the next generation of successful companies in Wisconsin? Although our initial focus is on early growth stage companies, our vision is to help address funding needs across the lifecycle. We’ve been working on data projects to show how Wisconsin companies start, grow, and scale, and one of the outcomes will be a series of blog posts.
We’ll address what kinds of companies are growing, the kinds of funding they’re leveraging, and more. If you have a question we can help address or a dataset we should explore, please reach out on LinkedIn or email and let us know!
About Valency Fund
At Valency Fund, we focus on early growth-stage companies based in Wisconsin in the advanced manufacturing, agribusiness, and technology sectors. We fund growth initiatives for companies that have:
Strong Foundation: Diverse, growing revenue streams, including >$200,000 over past year
Scalable Growth: Potential for strong revenue growth (>10%) without matching increase in costs
Strategic Capital Use: CEOs with a concrete plan for deploying growth capital—whether that's scaling operations, expanding market reach, or accelerating production.
Path to Profitability: Companies with visibility to positive cash flow.
Wisconsin Roots: We invest to strengthen Wisconsin businesses.