There are many ways to capitalize a new business. Angel financing, venture capital, and private equity are popular methods of raising capital, but it is important for business owners to understand the difference. These different methods are appropriate at different stages of your business life cycle. Successful entrepreneurs know when and how to use them effectively.
Stages of the Business Life Cycle
Before a business starts any operations or has a single customer, it will need startup capital. It is at this beginning when angel financing (or “seed investors”) comes in. These initial investments of “seed money” allow entrepreneurs to take their initial idea and turn it into reality. The earliest phase of the business cycle, however, is also the riskiest. There is a high chance that angel financiers will lose their entire investment. But angel financing typically has the highest returns on investment to compensate for this risk.
Once a business has been converted from an abstract idea to a concrete company, it will need more substantial investments to move from the fragile stage of inception to the stage of profitability. It is usually at this point that business owners look for venture capital. Venture capital is administered by highly skilled finance professionals at hedge funds and other finance companies. These finance professionals closely scrutinize businesses to see if they have proven success with their revenue model, if they have a growing customer base, and if they have a reasonable plan for a successful ongoing revenue strategy. If these criteria can be met with demonstrable evidence, venture capital may be offered, but there are usually contingencies. The finance professionals investing venture capital will usually want to be involved with the management of the business as it enters profitability. Their experience can help ensure the business is successful as it enters this critical stage of development. Control also helps finance professionals feel that their venture capital investments face less risk in an ever-uncertain market.
Once a business has developed profitable margins and has stable cash flow, it is prepared to take on more sizable debts. At this stage, private equity comes in. Private equity faces less risk than angel investments or venture capital because the business has gone beyond the risky early stages into a new phase of proven profitability. Less risk means less reward for investors, but it also means that private equity can be invested on a much larger scale.
Size of Investment
The amount of risk also affects the amount of capital you are able to raise. Seed money or angel financing is limited because it is used at the riskiest stage of a new company’s existence, and there is a good chance that the entire investment will be lost. Venture capital is available on a larger scale (sometimes in the range of several million dollars) because venture capitalists have vetted the investment and intend to help manage the company to protect their investments. By the time a new business is stable enough to take on the debt of private equity, the amount of money that can be raised is far more flexible. Some large companies are able to raise billions of dollars through private equity investments.
Experienced Financing Attorneys for All California Startups
Successful business owners raise capital using the right types of funding at the right stage of their business development. The experienced California corporate lawyers at Structure Law Group can help your new business capitalize effectively. Call (408) 441-7500 to schedule a consultation.