If you are looking for startup capital for your new business, there are a variety of funding opportunities available to you -- each with their own benefits and potential pitfalls. By thoroughly understanding your options, you can make an informed decision to find the investment partner who is the ideal fit for you and your business.
Private equity is a broad term used to describe capital invested in a company that is not publicly listed or traded. For many companies, private equity firms provide an alternative to capital loans. Unlike loans, funding through private equity does not have the expectation that the investment will be repaid when structured as true equity funding. Equity funding is particularly beneficial to those starting new businesses or needing to scale quickly, especially during uncertain economic conditions when traditional financing and loan approvals are more difficult to obtain.
That does not mean that equity funding is without its risks and pitfalls. These large capital infusions typically come at the price of equity in your new company and, therefore, future profits and even possibly key business decision making depending upon the dilution and ownership percentage of your shares. In addition, many large private equity firms are backed by institutional investors who have strict and often unwavering expectations regarding return on investment.
Private equity can also be structured as convertible debt. Unlike an equity structure, convertible notes do come with the expectation that the initial investment will be repaid with the option to convert the note into shares of the company once benchmarks are hit or the company reaches the next phase of its growth cycle. Be particularly wary of the terms of any convertible debt deals. According to Forbes, “It should never be a senior, secured note, like you would get from a bank or pure debt lender. As any investment that has a chance to ‘strangle hold’ the company in the event of it not hitting its plans, is a recipe for disaster for all involved. Expensive interest rates that need to be paid in cash, or restrictive financial covenants based on your balance sheet metrics are simply not reasonable in the venture world.”
According to investopedia.com, private equity traditionally tends to fund larger, more established companies that are seeking an equity infusion or a chance for company founders to transfer some of their ownership stakes. Within private equity, however, there is a subset of funding focused primarily on startups called venture capital.
Venture capital has gained a solid reputation over recent years as a source of go-to funding for startups. Venture capital is funding given to startups and early stage businesses who show strong growth potential. Venture capital takes the form of “seed” stage, “early” stage, and “growth” stage funding, depending on where your company is in its growth cycle. As with other types of private equity, venture capital can be structured as either an equity investment that does not need to be repaid or a convertible debt that can be converted into shares, stocks, or equity in your company.
From an investor’s perspective, venture capital is one of the most risky investment opportunities. Because of this, venture capital funding is best suited for new businesses with a high growth trajectory and potentially significant return on investment. For the startup or young business enterprise, it comes with the same potential pitfalls as traditional private equity. Thoroughly evaluating any valuation proposal or investment offer is critical to ensuring you receive the funding needed for getting your business off the ground or scaling quickly while maintaining future profits without finding yourself in a situation where a venture capitalist has too strong of control of your business or future profits.
Angel investors, or private investors, are private individuals who invest early in startups or young businesses. Angel investors take on many forms -- from friends and family who provide initial seed money to a high net worth individual who is an experienced entrepreneur ready to help others succeed. Funding from angel investors can come as a one-time investment of capital or as an ongoing infusion of funds as needed. Angel investors are particularly desirable because, as explained by investopedia.com, they usually invest in the entrepreneur starting the business rather than the viability of the business. They typically offer more favorable terms than other lenders, private equity firms, and venture capitalists and serve as experienced mentors and guides to new entrepreneurs. Angel investors are focused on helping startups take their first steps, rather than the possible profit they may get from the business. Essentially, angel investors are the opposite of venture capitalists.
Despite the more favorable terms offered by angel investors, funding is still typically tied to equity in your newly established company. Understanding how any ownership percentages impact the future of your company -- and your role within it -- is key to negotiating an angel investment that is a good fit for your startup.
Family offices manage the investments of high net worth individuals. For many companies seeking a flexible investor, private family offices represent the best of all worlds. Family offices are becoming an increasingly popular and sought after funding source due to their flexibility and the expertise they bring to the table. Because of their autonomous nature, family offices can make a variety of investments in any way they see fit, allowing them to act as private equity, venture capital, or angel investors depending upon the unique situation of each individual investment opportunity.
Perhaps the greatest benefit to receiving funding from a private family office is the flexibility it affords new business owners during the initial growth and scaling phases. Unlike venture capital and private equity firms, family offices have unparalleled flexibility in who they fund, how they fund them, and what they deem a successful investment. They are not limited to a handful of investment options, but instead have the latitude to invest in any project or investment opportunity that they feel aligns with their core values and will result in a mutually beneficial investor-partner relationship.
At Scandia Partners, for example, we value people over profits and understand that family and people come first. While we maintain a high standard of excellence and put our expertise to work to help our partners achieve that standard, we also understand that success is measured by more than solely monetary returns.
If you are interested in seeing if Scandia Partners might be the right investing partners for your startup, we’d love to talk.