Debt and equity financing are often what is desperately wanted by most entrepreneurs. It helps inject lifeblood into the daily runnings of the business and boosts your resources to achieve objectives, and sometimes, depends on the survival of your business. Private equity financing is what is sought by most though, and what eludes even the most experienced entrepreneurs, and is what is focused on in this article.
Understanding Equity Financing
Equity financing is the process of raising capital by selling stocks of ownership in a company. Equity financing for startups provides access to funds without taking on debt financing. As a founder, grasping the concept of private equity financing and the types of equity financing that come with it is crucial to raising equity funding for startups.
The difference between debt and equity financing is that equity financing involves selling ownership shares to investors, while debt financing involves borrowing money that has to be repaid with interest over a fixed period. Each option has its pros and cons, and the choice between the two will depend on a bunch of factors, such as the company’s financial condition, plans, and risk tolerance.
Types of equity financing
Angel Investments – Angel investing refers to the process of HNWIs investing their own funds to provide equity funding for startups. They look to invest in innovative and high-growth potential startups and often help with their expertise and network connections.
Venture Capital – Venture capital (VC) comprises funding startups that have high growth potential. They like to invest in disruptive technologies.
Crowdfunding – Crowdfunding is small amounts of capital sourced from a large number of people to fund a business. The 4 different ways to raise money via crowdfunding are as follows:
- Peer-to-peer lending
- Rewards-based Crowdfunding
- Equity Crowdfunding
Initial Public Offering (IPO) – IPO is when a private firm goes public by offering its shares to the general public on a stock exchange for the first time. The company issues shares to the general public to raise finance and helps investors get a return on their investment.
Pros of equity financing:
- No obligation to repay
- Able to access expert advice and mentorship
- Able to attract top talent
- Increased credibility
Cons of equity financing:
- Loss of control
- Dilution of ownership
- Managing shareholder expectations
- A time-consuming and complex process
Preparing for Equity Financing
Use this as a quick plan of action, and you’ll find yourself in a good position to secure an investment:
- Evaluating the funding needs – the funding needs of a business require a detailed valuation of the financial situation, business goals, growth plans, and access to current networking opportunities
- Building a strong business plan – fundamental to guiding your business. Start by having a vision for your business, and how long it would take for you to achieve it.
- Building a strong team – personnel matters since it will have a huge impact on investors. You’re expected to show investors who are working with you on your team.
- Identifying potential investors: This is done by having an awareness of the types of investors who can not only fund your needs but also add value to your business. Try researching and connecting with people online.
- Building relationships with potential investors: Rather than simply moving on to the next investor after a rejection, try to make a connection with the previous one. Try to learn from them and hone your fundraising skills.
Pitching to Investors
Creating a narrative in your pitch deck is crucial to showing how funding would help you with your start-up pitch. Your venture pitch should include:
- What the problem is
- How you intend to go about solving that problem
- Your core value proposition –focus on what makes your business stand out from the crowd
- Your company pitch deck must show your competitors and how they would affect you. Then quantify your financials –your Revenue Model and Financial Projections. Preparing a pitch deck can be an essential part of pitching your business or idea to potential investors, clients, or partners.
It’s important to be able to grab attention as quickly as possible, which is why an elevator pitch is essential. It outlines a concept, product, service, or idea in a nutshell. The goal of an elevator pitch is to grab attention and create curiosity about what you’re offering in a short amount of time, 30 seconds to two minutes.
Finally, it’s important to have a Q&A session at the end where you can answer any questions, negotiate terms, and start the process of due diligence.
Closing the Deal
A term sheet is a document outlining the terms and conditions of a proposed business deal between two parties. The term sheet includes details such as the proposed price, amount and type of funding, the ownership structure, the rights and responsibilities of each party, and any special provisions or conditions. It’s what saves you from unnecessary trouble in future.
While negotiating the term sheet, identify your goals and communicate them to the other party. Do your research and be up-to-date about industry norms. Always be supportive and respectful. Lastly, be ready to walk away from the deal if you feel like the terms aren’t what you want.
Use these pointers for post-financing considerations:
- Have good relations with investors
- Governance and reporting: Follow the legal and accounting procedures pertinent to your county
- Shareholder agreements: Includes voting rights, management structure, share transfer restrictions, dividend policy, and dispute resolutions
- Exit strategies: Including an IPO, acquisition, management buyout, or secondary market sale (when investors sell their shares to other investors instead of waiting for a liquidity event).
Alternative Sources of Equity Financing
If you feel that the current method of equity financing is not the way to go for you, try exploring other options such as angel investing or crowdfunding. There is one more option you can choose, although not completely sourced from equity; debt-equity finance. Debt-equity finance is when a company raises capital by issuing a combination of debt and equity securities. The company issues debt securities like bonds, notes, or loans to borrow money from investors, while also issuing equity securities such as stocks. They are flexible and cost-effective, but it requires wary management of financial risks.
Raising equity can get brutal, but remembering your business’s goals along the way helps figure a lot of things out. Once you’re done understanding what equity finance really is, and what it has to offer, prepare for it by evaluating your needs, having a business plan, and identifying and building relations with the right investors. Once you have the right offer, make sure to structure the deal in a way that is to your advantage by having air-tight term sheets. If you’re still looking to find the right investors for you, Marquee Equity can help you get direct access to 32,000+ VCs, PEs, Family Offices and Angels to scale your business. Call +1-213-600-7272 now!
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