There Are Many Equity Financing Sources Out There.. Which One’s Best For Your Business?

First off, lets focus our discussion around equity financing objectives, not the exact form whether it be angel, or venture capital group, or institutional fund, or whatever.

Regardless of the form of equity financing source, what’s more important is the investor requirements or intents.

Too often small and medium sized business owners or entrepreneurs start seeking equity financing for a business venture because they either realize that they can’t borrow enough debt financing, or they need more equity in the business to leverage more debt financing.

So, effectively they’re backing into the need for equity financing in the first place, out of necessity.  And because most types of business financing capital hunts are unplanned, the business ownership group is usually in a rush due to some time pressure, perhaps even in an early stage panic mode.

As a result, the business owners are not perhaps as selective as they should be, or they don’t start the equity financing process with their objectives clearly outlined.

This is where all the different shapes and sizes of equity capital come in.

Like the business owner trying to secure capital, the investor is trying to place capital.  Each investor is going to have their own profile of industries they like, returns they expect, level of risk, business stages their interested in, and so on.

My question to the business owners looking for money is are they presenting an investment opportunity for investors they want or don’t want?

If you’re in a rush, which most entrepreneurs are, many will answer that they don’t care about the profile or reputation of the investor, they just want the money.

While this mind set and approach can create the desired results, its unlikely that the results will be optimal for the initial business owners that were trying to get equity funding, but its much more likely that things worked out just fine for the investor, especially if they are a well seasoned equity capital provider.

Let me explain.

The more of a rush you’re in and the less thought through your strategy and implementation plan are, the more likely you’re going to attract very opportunistic investors that understand their superior bargaining position and will take full advantage.  If they inject money, they will likely command a large ownership stake, likely a large controlling interest, board control, and every other kind of control their lawyers can think up.

But again, there are all sorts of variations around this theme.  The key point is, unless you know what you want and are in a good bargaining position to get it, you’re likely to see very one sided investor offers that may very well give you the money you’re looking for, but ask for close to your soul in return.

When a business ownership group or individual is seeking equity financing, they need to consider two questions before starting their courtship with potential investors.

Question 1:  How much of the company (and in what ownership form and conditions) am I prepared to offer for the capital I seek?

Question 2: Am I looking to sell off an interest in the business for the long term or for the short term only?

Question 1 has a lot to do with your bargaining power which will relate to what business stage you’re at (pure start up, pre-commercial, early stage, growth, etc.), what types of assets you own and their ability to appreciate in value and generate cash flow, your management team and their related experience to what you’re trying to do, how much capital you’ve put into the business, the related time line for making use of the capital to be invested and the payback period, and so on.

Question 2 is critical to your ability to build out your business over time according to your vision and strategy.  For example, a business ownership group or individual may be prepared to relinquish a large portion ownership, perhaps even a controlling interest, if the original group or owner has the ability to buy back the interest at some predetermined time in the future for some predetermined price or price calculating formula.

Without this sort of objective, the equity capital you raise can very well get into the be careful what you wise for category.  For example, its not at all uncommon for very opportunistic investors to aggressively buy into a company with great potential with the underlying goal of getting rid of all the original owners and managers within a few years in order to take complete control of the venture.

There are also investor financing groups who are only looking for short term investing opportunities which in many cases are no more than 5 years in length.  They typically will require a certain amount of minimal return with some upside potential based on the performance of the business.

The key here is to clearly understand what you have to negotiate with and what you’re prepared to live with before seeking equity financing.

That way you’re more likely to get something that can work for both sides and if you have to compromise, at least you’re doing it with you eyes wide open.