Meet Private Equity Financing Criteria
Private equity financing is exactly what the name implies - money is invested in a privately held business in exchange for partial ownership. The money that is invested may come from private individuals or institutional investors which means there are plenty of opportunities for finding capital for business expansions.
The goal of the investment, of course, is to earn more return than could be earned otherwise. It can be like venture capital or angel investors in the sense the investors can choose to invest startup funding, but usually the business has been operating for a while and needs money for expansion. Private equity financing often involves large amounts of capital, though there are really no hard and fast rules about amounts.
Giving Investors the Assurances They Seek
Despite the fluid nature of this type of financing, there are criteria a business will have to meet in order to obtain this type of business funding. Like equity partners, the investors will look for assurances that their money will be used wisely and in a way that increases the likelihood that the investment will bring higher returns than would be expected if giving business loans. The investor will balance the risk of investment loss again the possibility of investment gains and then make a decision as to whether the risk is manageable.
Following are the general guidelines on what an investor will be looking for when deciding whether to accept the risk that is associated with private equity financing.
· Does the entrepreneur assume more risk exposure than the equity partners or investors?
· What stage is the business currently in and does it need startup funding, early stage funding or expansion funding?
· How much experience does the management have in the industry and business?
· How large is the investment request and how does it compare to the size of the business?
· Is there a quality business plan with realistic goals and projections?
· Is the marketing plan complete and include well defined strategies?
· What is the company’s history including its historical financial and market performance?
· Is the business willing to accept investor restrictions placed on the investment?
The last question may seem obvious at first glance, but it’s on the list for a reason. Private equity investors can set their own unique requirements and restrictions for business funding, and you must be willing to agree to them. The good news though is that you have more negotiating leeway since this is private funding and not financial institution lending.
Finding the Right Kind of Capital
Though companies have been experiencing difficulties getting approved for business loans in the current economy, private equity financing has always been available. Unfortunately many business owners simply don’t know how to go about finding or raising this type of money. It’s similar to venture capital in many ways and one way is that you must know where to look to find it. Everyone knows how to march down to the bank and get turned down for a loan, but too many people overlook the investing opportunities that private equity financing offers.
There are many sources of capital available today ranging from angel investors to private equity financing. The one that is right for your business depends on many factors including the current business stage.
Sprout Opportunity Business Wings with Angel Investors
Angel investors are playing a larger and larger role in the business investment community for obvious reasons. The banks are making it more and more difficult, due to a tightening of credit policies, for an entrepreneur with a new business idea or an early stage business expansion plan to find funding. Yet you can’t keep a good entrepreneur down. Angel investors see a need in the marketplace they can meet while businesses can see a need for investment fulfilled.
It’s a win-win arrangement.
Planting Seeds for Business Success
Finding adequate funding will probably always be one of the greatest challenges a business must meet. On the other hand, investors need a good place to invest their money to increase returns. The tight credit market has created the ideal forum for bringing businesses and private investors together. By investing in companies like yours, angel investors can earn a higher rate of return while your business gets the much needed capital injection required to move forward.
One of the nice features of this type of funding is the fact startup businesses can attract the angel investors when they could not attract venture capital or equity partners due to lack of financial history. The angel investors are known for being willing to give young companies with exciting new ideas, concepts or methods opportunities they would not be able to find elsewhere.
How big is the angel investor market? According to the Center for Venture Research at the University of New Hampshire, in the first two quarters of 2010 (latest numbers reported) angel investors invested $8.5 billion. As many as 25,200 entrepreneurs obtained this type of business funding. Many people are not aware of the size of the private investment market that includes angel investors, venture capital and equity partners.
Harvesting Success
Angels are committed to providing startup funding and even money for small business expansion. Business loans are made in numerous industries too including:
- Healthcare
- Energy
- Industrial production
- Green technologies
- Retail
- Biotech
- Software
- Computer equipment
Originally angel investors tended to be sole financiers or loose groups of investors willing to make business loans for new business ventures on an informal basis. Today there are formal investing groups able to offer larger amounts of business funding to new enterprises if the entrepreneurs have solid business plans. In fact, the angel investing industry has grown to point where they have their own trade association called the Angel Capital Association.
One of the most common questions asked is: What makes angel investors different from venture capitalists? Though there are no formal definitions, angels are more likely to invest in startup businesses or existing businesses that are still in the early stages of operation. These are the types of businesses that often have difficulty finding traditional loans. Angels will also invest smaller amounts. In fact, the news reports are full of stories of angels making microloans.
Venture capital, on the other hand, usually invests in businesses that have been in operation for a while or have a proven financial track record of some kind. Another difference between angels and venture capitalists is angels invest their own money while venture capitalists usually invest money from formal funds created for investment purposes.
Making Good Sense
If you are searching for startup funding, approaching angel investors makes sense. This is a group of investors more open to funding entrepreneurs ready to get their small businesses up and running.
Start Up Business Funding – Don’t Take No for an Answer
Your cousin Lou has told you that he wishes he could help out but start up business funding is out of the question. There’s the mortgage to pay and gas prices are rising and the kids need braces and on and on the excuses go. You received the same answer from Aunt Sally, your best friend Dave and even your own father. You have a great idea for a new business but can’t seem to convince anyone to help you get it off the ground.
Many entrepreneurs are rich in great ideas and have plenty of enthusiasm and a willingness to do what it takes to succeed. But desire and excitement are not dollars, and that is what is needed to get any business off the ground. Finding startup funding can be one of the most difficult challenges faced. You haven’t proven yourself to potential investors, but you can’t prove yourself unless they give you business funding. It’s the proverbial catch-22. It reminds you of the time you were looking for your first job and the employers told you that you had to have experience first!
Plenty of Options for Those Who Persevere
Many entrepreneurs exhaust all of their own money before they even start looking for outside investors for start up business funding. If you were lucky enough to convince some of your family and friends to invest in your new business, there is still a good chance it was not enough money. That means you have to find other sources of funding in order to take the business to the next level which may include buying inventory, purchasing equipment, or making the next 6 months of payroll. The thought of your business never getting off the ground or coming to a screeching halt is distressing to say the least.
Fortunately, you have plenty of options when it comes to funding sources. Given the complexity of convincing financial institutions or private investors to invest in a tight credit market and limping economy, it is always best to get professional assistance. Gaining access to a network of funders is critical, and like any “private” club you need an introduction.
What are these sources of funding?
- Angel investors and angel organizations – Earthly angel investors are really private investors willing to invest their own funds in fledgling businesses. The often invest in the form of equity or convertible debt. They truly seem like angels when you need funding, but these angels are investing because they believe they can get a higher rate of return by investing in your company as opposed to investing in traditional financial tools. Many angel investors are also interested in promoting businesses in which they have personal experience or a special interest.
- Business Loans – These are loans from financial institutions like banks. Despite what you read, the banks are lending to businesses. But since credit is still tight due to the recession, you improve your chances of success by accessing those banks with a record of lending through the recession. That is where a professional can be of invaluable assistance in locating funds domestically or globally.
- Venture Capital – Venture capital is money that is loaned by a venture capital firm or individual. Larger amounts usually come from firms. These firms are often looking for start-up businesses that have high potential for fast growth and early returns. They take an equity position in your business meaning the venture capitalists take part ownership. But there are innumerable ways to structure the financing and equity arrangements so don’t rule out this type of funding as a possibility.
- Equity Partners – This is start up business funding in which private individuals invest in your firm in exchange for part ownership. Ownership can take the form of stock ownership, but in some cases the investor may want to be involved in a way similar to a partner.
Make No Assumptions
There are numerous types of start up business funding as you can tell. There is no reason to assume that since you are a new business that money is not available from traditional sources like business loans or non-traditional angel investors. You can pursue startup funding from equity partners or venture capital firms. And while you are looking for business funding, you should go ahead and ask your cousin Larry if he is interested. He just might be the first one to say, “Yes.”