In this next section we will delve further into each of the six factors of using Equity Capital for funding your business. Below is a brief overview of the blog posts soon to come!
Friends and Family Financing is the means of receiving initial investment funds from close confidants – this means friends, family members, or co-workers. Family and Friends are great resources for startup funding because they are easy-to-find sources that tend to have less stringent payback requirements. Funding from friends and family is often limited and not the sole form of initial investment, although it is known as the most common startup financing route. According to a survey in the 2004 Inc. 500, half of the CEOs of the nation’s fastest growing companies stated that family was involved in regards to start-up capital.
Angels are private investors that financially back startup companies. Like venture capitalists, angel investing is a high-risk, high-reward game since the likelihood that a startup will fail is so high. Angels are not professional investors that represent an outside company. Instead, they are putting their own money into the company. As a result, angels tend to give less money to entrepreneurial companies than VC’s do. On average, an angel investor will invest $364,000 in a company and get about a 30% return on their investment.
Angel Investor Groups are organizations made up of individual accredited angel investors brought together under the purpose of creating efficient financing presentations, pooling investment funds, and learning from one another. By allowing entrepreneurs to efficiently line up presentations, it funnels and screens candidates towards angels that may pool their funds together and use each other’s knowledge into a new business investment.
Venture Capitalist Firms are institutions that make investments in early-stage companies. VC firms are not investing their own money, but instead represent others such as pension funds. Unlike SBA Loans, venture capitalism is a high risk, high reward game; VC firms know that if their investment pays off, the return on investment will be 10, 100, or even 1000 times what they put in. When a VC invests in your company he or she partially owns your startup, which means that venture capitalist can exert some control on company decisions. They would like to get at least 10 times their money back in 5-7 years. According to the National Venture Capital Association, VC’s gave over $28 billion to 3,808 companies in 2008; roughly $7.4 million per transaction.
Also known as Strategic Investors, Corporate Investors are corporations that seek investment in smaller start-up companies. The reason for this is to firstly gain financial returns, but to also retain partial control over potential changes in their target market and industry. It is a great way for a developing company to create a relationship with an established company, especially if their good or service will directly impact the mutual industry or corporation. These types of investments can range from a couple hundred thousand dollars to a few million.
A private equity firm is a corporation that manages a collection of operating partners that have invested in a specific enterprise. They manage investments of private equity which can be defined as the private ownership and securities of a corporation. Private equity firms raise cash and loans, opposite to that of stock ownership which handles stocks and bonds.