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Guide to Late-Stage Funding & Funds

Guide to Late-Stage Funding & Funds
Austin Kilham
Austin KilhamUpdated October 12, 2022
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
Even after a business has developed a proven product and has meaningful revenues, it may still need outside investments to continue to grow. Late-stage funding can help a business launch a new product, enter a new market, or purchase another company. This type of investment often occurs when a company is close to selling or preparing to go public. Here’s a closer look at how late-stage funding works, where businesses can find this type of financing, plus the pros and cons of later-stage funds for both companies and potential investors. 

What Is Considered a Late-Stage Startup or Company?

Generally, a business is considered late-stage when it has proven that its concept and business model work, and it is out-earning its competitors.Other characteristics of a late-stage business or startup include:
  • It is generating positive cash flow.
  • It has a well-known product with a strong market presence.
  • It is starting to expand into tangential markets.
  • Investors are seeking liquidity.
  • It is six to 12 months away from an exit or liquidity events, such as a sale or an initial public offering (IPO).

What Are Late-Stage Funds?

Late-stage funds are often the last round (or rounds) of funding collected from investors before an exit event. These funds allow company owners to wrap up any final goals they wish to accomplish before a sale or before offering shares to the public through an IPO.Late-stage funds typically come from groups such as hedge funds, investment banks, and private equity firms. Since the company is thriving and already has a proven track record, these new investors are typically willing to invest significant amounts of money.

How Do Late-Stage Funds Work?

Late-stage funding refers to any method of generating capital by a business in the later stages of its roll-out. Typically, this type of funding is equity-based. This means that neither you nor your business will incur debt. Instead, you sell partial ownership of your business to an investor or investment firm. Late-stage funds can also be debt-based, however. This type of financing includes different types of small business loans or a business line of credit offered by a bank or online lender. 

Pros and Cons of Late-Stage Funds

Whether you’re an investor or a business owner, late-stage funds offer both benefits and drawbacks. Here’s a look at the pros and cons from both perspectives.

For Businesses and Startups

Pros of Late-Stage FundsCons of Late-Stage Funds
Provides the capital you need to take your business to the next levelWith equity financing, your ownership stake will be reduced
You can seek debt- or equity-based late-stage financingFinding investors can distract you from your business
Some investors offer business experience, advice, and networking opportunities in addition to fundingLate-stage Investors and lenders will expect your business to grow rapidly

For Investors

Pros of Late-Stage FundsCons of Late-Stage Funds
Potential for high returns, since rising late-stage startups are often successfulYou miss out on early exponential returns and very low-priced stocks
Considerably less risky than investing in early-stage startupsLate-stage companies still face annual revenue uncertainty
Can buy stocks in the company before it goes publicAll startup investments, even those done in the late-stage, come with risk

5 Types of Late-Stage Investors

Businesses entering late-stage funding may encounter — or need to woo — a variety of investor types. Here’s a look at the kinds of investors that typically support late-stage companies.

1. Angel Investors

While angel investors tend to be early-stage investors, an entity known as an angel special purpose vehicle (SPV) often invests in later-stage businesses. An angel SPV pools capital from multiple investors to fund a company in return for equity. These investors may be ones you already know and who have already invested in your company. Angel SPVs often invest in late-stage businesses as a way to increase the number of shares they own. 

2. Hedge Funds

Hedge funds offer a way for wealthy individuals to pool their money together and try to beat average market returns. Typically, hedge fund managers will use aggressive strategies to produce positive returns for investors. As a result, they are interested in investing in rising late-stage startups, since they have a potential for a high return.

3. Private Equity Funds

Private equity funds are partnerships that are focused on buying and managing companies to help drive up value before a sale. Like hedge funds, private equity funds tend to jump into later rounds of investment once a company has proven itself. Equity fund investors not only provide capital, but can open doors for your company with their large networks.

4. Growth Funds

A growth fund is a mutual fund that includes companies expected to grow faster than that of their industry peers. Unlike traditional venture capitalists, growth funds tend to be less involved in the day-to-day running of the companies they invest in. Instead of looking to advise you, they tend to be more focused on a firm’s financials, such as growth rates and customer acquisition costs.

5. Strategic Investors

Strategic investors are often larger companies in the same market space as you. Typically, these investors will want equity in your company, along with something additional, such as a licensing or distribution agreement. They may also be looking to eventually buy your company, using the strategic investment as a way to get to know it first. 

Alternatives to Late-Stage Funds

Not all growing businesses need, or want, to bring in late-stage business investors. Fortunately, there are some alternative ways to get the capital you need to take your company to the next level.

Business Loans

Banks, credit unions, and online lenders offer business loans that can be used for a variety of purposes, including business expansion, acquisitions, and franchising. When you apply for a business loan, you’ll typically need to tell your lender what you intend to use the money for and provide a business plan. If approved, you will receive a lump sum of cash up front that you then pay back over time with interest. Recommended: Applying for Million Dollar Business Loans 

Business Lines of Credit

A business line of credit is a form of revolving credit that allows you to borrow money as you need it up to a certain credit limit. You only pay interest on the amount you borrow and, as you pay down your balance, the amount you borrowed is available again. Business lines of credit are particularly useful when you aren’t sure exactly how much cash your business will need, or if you will need some capital now, and more several months from now.

Venture Capital

Venture capital is a form of private equity that funds new companies with a high potential for growth. The companies sell ownership stakes to venture capital funds in return for financing, technical support, and business management expertise.While venture capital financing typically involves early and seed round funding for startups, it can be provided at later stages of a company’s evolution. Whatever stage a business is at, the venture capital firm’s goal is to grow their portfolio companies to the point where they become attractive targets for acquisitions or IPOs. 

View Your Business Loan Rate

If financing is part of your growth plan, Lantern by SoFi can help you compare small business loan options. With our online lending tool, you can quickly access offers from multiple small business lenders matched to your company’s needs and qualifications. It just takes one short application, and you don’t need to make any type of commitment.

Frequently Asked Questions

What exactly is late-stage funding?
When is a startup considered late stage?
What are the different main stages of funding?
Photo credit: iStock/PeopleImages

About the Author

Austin Kilham

Austin Kilham

Austin Kilham is a writer and journalist based in Los Angeles. He focuses on personal finance, retirement, business, and health care with an eye toward helping others understand complex topics.
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