Most readers aren’t investment professionals. But everyone participating in private business investment or public markets should try to gain a reasonable grasp of what the usual investment sequence is. I’ll present it below, with the caveat that the junior mining investment paths are substantially different from the standard investment sequence. I’ll present junior mining investment in a subsequent letter, including the interesting components that make Canada special. In the meantime, I will point out a few key differences in italics as we go.
Companies raise money in stages. Each stage has its own investors, instruments, and price. The sequence explains who owns what, and on what terms, by the time shares reach a public exchange. In a perfectly evolving company, the price of investment entry increases with each round, because the company would have turned previously invested cash into substantially more company value.
Friends and family (pre-seed)
In most start-ups, the earliest capital comes from the founder’s own savings and from friends and family, ranging from a few thousand to a few hundred thousand dollars. It usually arrives as a SAFE (Simple Agreement for Future Equity) or a convertible note — instruments that postpone setting a share price until a later priced round. Risk is highest here; most companies at this stage have no product and no revenue. You are investing in a person and an idea. Maybe it will pay out, but most likely it will become dust. My recommendation is to write off the investment (mentally) immediately, else risk that friends and family will become non-friends and former family.
Seed
The seed round brings in angel investors and early-stage venture funds, typically from several hundred thousand to a few million dollars. The capital funds the next development stage. You will usually need to be an accredited investor: in the US that means a net worth above $1 million excluding a primary residence, or annual income above $200,000 ($300,000 jointly). The accredited requirement is not absolute. But most companies don’t want the regulatory hassles that arise when they accept non-accredited investors.
Series A, B, C and beyond
Caveat: most junior mining companies skip these rounds and instead go public quickly.
Once a typical company shows traction, it raises priced equity rounds led by institutional investors (venture, big mutual funds, sovereign wealth funds, occasionally private equity funds). A lead investor does the hard due diligence and negotiates the pre-money valuation (and board terms).
● Series A: the first institutional priced round, often $2–15 million.
● Series B: expansion capital, often $10–50 million, to grow the team and market reach.
● Series C and later: larger rounds, from tens to hundreds of millions, funding acquisitions, new markets, and the path to profitability.
Each round issues new shares and dilutes existing holders. Later investors typically receive preferred shares, giving them priority over common shareholders in a sale or liquidation.
Most growing companies also allow employees to earn ownership through stock options. Expanding the option pool can dilute existing shareholders just like issuing new shares.
Bridge and mezzanine
Between rounds, a company short of cash may raise a bridge — short-term financing, often a convertible note, to reach the next milestone. Mezzanine or pre-IPO financing — capital raised in the year or two before a company's Initial Public Offering (IPO) — often uses specialized securities that blend characteristics of debt and equity.
Initial Public Offering (IPO)
An IPO is the first sale of shares to the public on a stock exchange. Underwriters — investment banks — set the offering price, market the shares to institutional clients, and allocate them. Insiders and early investors are usually barred from selling during a typical lock-up period of 180 days. The offering raises new capital for the company and gives early investors a route to exit.
Junior miners often skip this too, and go public earlier, sometimes through reverse mergers into a shell. Again, this is for another day.
PIPEs and private placements
A PIPE — Private Investment in Public Equity — is a private sale of shares by an already-public company to selected investors, outside the open market. Shares are usually priced at a discount to market and may include warrants: the right to buy additional shares later at a set price. PIPEs let a company raise capital quickly without a full public offering.
In junior resource markets, private placements, including PIPEs, are the standard financing mechanism.
Follow-on offerings and other instruments
After going public, a company can raise more equity through a follow-on offering that sells shares gradually into the open market, or convertible debt that converts to equity later. Each adds shares and dilutes existing holders. Presumably all such dilutions should be for the purpose of benefitting the shareholders, and not for the purpose of extending the years management gets paid in a dying company, nor to support management teams building their own empire.
The 30,000-foot view.
Over time, capital investment rounds go from cheapest, riskiest and illiquid, to most expensive and most liquid. Early investors accept high failure rates in exchange for low entry prices; public buyers pay more for a proven business and liquidity. Each round dilutes those before it, justified by the intent to use the funds to increase enterprise value.
In free market capitalism, wealth can be created by deploying savings (capital) to invest in the exciting, intelligent ideas that people come up with to make the world a better place. This process allows for people to pick and choose what they think is important to fund, as opposed to having politicians steal their money and invest in what the politicians want to do.
It’s a glorious thing. Sure, it’s fraught with scammers. And political cronyism has come heavily into play. And much money that should go to creating new value instead goes to assuaging regulatory tyrants. But don’t throw the baby out with the bathwater. Profiting from deploying one’s savings to create a better world is the most important mechanism to advance human welfare and human freedom ever developed.
If you know people who think socialism is the way to make the world a better place, well, it’s time they learn a better, more moral, more honorable and far more effective way of doing so. Forward them our letters, and suggest they sign up for Crisis Investing.
Soon, I will present the ways that junior mining companies get funded. It’s a different world.
Sincerely,
John
John Hunt, MD
Excellent quick explanation of the steps from family and friends to public offerings and beyond, enterprise, capitalism, and making a better world.
John;
I would like to talk to some one in your organization. I am an ardent follower of Doug Casy for many years for his expertise.
My tel No is 8107019272. Email [email protected]. Profession. M.D. FACOG