Second-Stage Funding

Cliff jump
Cliff jump

Second stage-funding is a special type of financing round in venture capital finance and fits into the general concept of capital staging, that is, the portioning of capital contributions according to the achievement of milestones in the development of the financed firm.

It belongs to the broader category of the so-called expansion phase financings, which include second-, third-, and later-stage financings such as mezzanine and bridge financings. In contrast to early-stage financings such as seed, start-up, and first-stage financings, expansion phase financings relate typically to entrepreneurial firms that need additional capital in order to enlarge the product port folio through additional R&D, to increase production capacities, to penetrate new markets, etc.

Hence, the distinctive characteristic of second-stage financings is that firms already have at least one developed, that is a marketable product. Besides industry-specific aspects venture capital firms often specialize in financing entrepreneurial firms, that are in a distinctive financing stage.

That is, because financing and advising firms in those different development stadiums also need particular competencies on the side of the venture capitalist. Important aspects to be mentioned with respect to second-stage funding are the reduction of adverse selection and moral hazard problems, the professionalization of strategic management, the improvement of (financial) monitoring, networking, and managerial recruitment, as well as forcing CEO turnover if necessary.