Ravi Chandran
Equity financing a business is essentially different from borrowing in that the investor becomes a part-owner.
By: Hitesh Khan/
While they might not attend daily / weekly meetings, you can expect their representative to monitor your management actions and to be watching over your shoulder.
Venture capital is type of equity financing for business
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What does a venture capital investor look for? Well, it’s a bit different in focus from a lender. Venture capitalists do not want to be around forever in your business – they generally want to see an exit strategy that will see them out in about 5 years, with a high return on their investment.
The two usual exit paths are sale to another company or “going public” with an IPO [initial public offering]. Either of these paths are facilitated when your company shows good revenue growth and profitability. Unlike lending, the venture capitalist does share in profit growth.
Venture capitalists are interested in both high technology and various other industries, and they will look for a balanced management team – technology, finance, marketing, etc. – since it will take this type of management team to produce the revenue and profit growth that will drive increases in value and thus high returns.
Venture capitalists fund very few of the huge number of potential businesses that contact them every year, and most that are funded are not start-ups – they are already launched and have probably reached profitability. The venture capitalists will also probably be much more attracted to a company that includes management that has already had one or more successful launches – for the obvious reason that they know how to manage the growth for returns.
Angel investor is another type of equity financing for business
The angel investor or accredited investor is a special type of venture capitalist. Usually an individual with substantial net worth and income, he provides capital to startup companies and takes a personal stake in your venture. He might accept less control and a slower return on investment than other venture capital firms, but his investments share the high levels of risk and a potentially large return on investment so his investment criteria are similar.
Meeting angel investors and venture capitalists and matching them with investment opportunities can be difficult for 2 reasons – the sheer number of opportunities and investors, and qualifying or matching to get a good fit between investor and suitable opportunity.
Going public [IPO] may be yet another way of equity financing for business
Going public with an IPO is a complex and massive undertaking so it’s not a primary method of equity financing a business. The criteria for going public is market capitalisation of up to $300 million, excellent growth potential and an ongoing need for large amounts of capital.
Going public became a primary way of financing a large business, where profitability and growth potential are required. The actual process can take a year and consume huge amounts of two valuable resources – money to pay for all the fees and commissions, and executive time. It can be a real drain and distraction to senior management so it works mainly for companies that have established and deep management capability to “run the show” while others “ride the IPO”. If you are short of operating funds, don’t even think of IPO as a way to finance your family business out of a tight corner.
Government and other grants
Besides the usual sources for equity financing a business – debt and equity – there is the government and other grants. [A grant is different from a loan in that a grant does not have to be repaid]. Much information on these, including so-called information books and lists, is available on the Internet.
It can be a quagmire, and difficult to know if you will qualify or how much you will get [depends on program funding availability, decision of some bureaucrat, etc.] so it’s not such a reliable source, but if you have some time, you might get the seed funding you need. Like anything else with government, read and study the program criteria and make sure that your application is letter-perfect and addresses the goals of the program to which you are applying.
One of the most difficult aspects of equity financing a business is choosing just which approach is best for you. fortunately, there is lots of help available.
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