Private equity and venture capital investments are a fast-growing trend in 2017, making this an attractive option for companies seeking financial assistance for expansion. But as with any major decision, there are pros and cons. Understanding the current trends and challenges will put you one step ahead of the competition. Learn the basics first, then make a decision.
What are my financing options?
Small to early stage businesses often rely on bank loans, personal loans, bonds and credit card debt to get started or expand. Borrowers are expected, by contract, to repay the funds at a later date.
Private Equity/Venture Capital
Rather than go into debt, many business owners are choosing equity capital instead. This option allows you to sell shares of stock to investors who in return get an ownership in your company.
While both are viable options, debt capital is straightforward in that you get a loan and repay it; cut and dry. Equity capital, on the other hand, is more complicated. It requires owners to open their businesses to the opinions and emotions of other people. Understanding this upfront can save a lot of heartache down the road. Especially in today’s economy, where private funding is on the rise. But just because it may look like an appealing option now doesn’t mean it’s right for you. Take these trends and challenges into consideration before making a final decision.
What you need to know:
Despite concerns about probable hikes in interest rates in 2017 and stock market volatility in general, investors are gravitating to private equity’s promise of long-term double-digit returns. 2016 was the best year for private equity investing, and 2017 is expected to surpass it according to Forbes. It was the second year in a row for venture capital deals to hit more than $100 billion. Today, venture capitalists are flush with cash and are targeting promising companies who can offer very attractive returns. Even though there’s plenty of money to go around, the competition for investor capital is fierce.
So, what does this mean for businesses who need funding?
It means arming yourself with the facts before seeking financial assistance.
Pros for Equity Financing
Investors are infusing huge sums of money into startups now more than ever – especially in tech companies. Big name firms like Fidelity contribute up to 66 percent annual fundraising for technology startups. If you’re an innovative tech company, now would be the time to explore equity financing.
Solo investors are on the rise, meaning funders are investing a portion of their private equity allocations directly into startups without third-party assistance. It allows them to bypass manager fees, freeing them to invest more money into promising transactions. Although bigger deals are being cut, fewer are getting funded. And fewer opportunities equal more competition.
Private investors can get the ball rolling faster than public companies because they have fewer restrictions and red tape to maneuver. Their nibble approach is attractive to business owners looking to expand immediately.
Cons of Equity Financing
Seed and Series A investors are looking for at least 10 to 20 times return and a significant ownership stake. Essentially, you agree to sell part of your company plus give up substantial control.
With control, investors also have the right to reset the direction of your business. Their sole concern is profit. So, often the original goals – the ones that made you successful in the first place – will shift or be overlooked entirely.
Dilution of first investors can occur. Meaning, if you had an investor(s) before equity financing, then the value of their original contribution could go down due to the addition of a substantially larger influencer.
In conclusion, there are multiple ways to finance and grow a business. Understanding your goals and yourself will help you make this tough decision. While debt might not be an appealing option, there are benefits to a straightforward capital agreement. Conversely, equity financing may be a bigger risk but offer a greater reward. Don’t rely on trends alone to make this important choice. Arm yourself with the facts and then proceed with caution.