This article discusses the various forms of financing for new ventures. It is indeed the case that any new venture would need capital and more often than not, entrepreneurs need significant capital for launching their ventures. Further, this article also discusses how Angel Investors have become important in recent years and examines how buyouts take place in the business world.
Need for Financing
Any new venture needs financing and hence, entrepreneurs have to decide where to get funding from, how to invest, and how much to borrow. This article is concerned with the sources of entrepreneurial finance which the entrepreneur has access to. Indeed, one of the central preoccupations for entrepreneurs is where and from to get the funding in order to kick start their ventures and hit the ground running.
This form of financing the ventures applies when entrepreneurs invest their own money, or offer stakes in their venture to individuals in return for their services, as well as includes other forms of financing such as delaying payments to partners, offering sweat equity to employees and other stakeholders etc. The important point to note about bootstrapping is that it can be actualized only when the entrepreneur does not need significant amounts of capital as all the methods mentioned above relate to investments that are limited in their capital mobilization. Another important aspect of this type of financing is that entrepreneurs typically offer equity in return for work done which is a non-monetized form of financing known as sweat equity.
This type of financing is the most common for entrepreneurs and this category includes all the types of financing mentioned subsequently. When compared to bootstrapping where the entrepreneur raises money either from internal sources or by offering equity in return for work, external financing often involves sourcing capital from external sources which are tangible and immediately monetized forms of financing. Apart from the types of external financing described below, private equity or equity to large investors in return for financing is often the norm for entrepreneurs.
We often hear the term Angel Investor spoken by entrepreneurs or mentioned in the business press. Angel Investors as the name implies are literally and metaphorically the Knights in Shining Armour to the entrepreneurs as they not only invest their own monies but are also known to guide the entrepreneurs in actualizing a successful business model. Indeed, Angel Investors are also known to invest in new ventures as a means of doing good for society as well as to share their wealth with new and up and coming entrepreneurs who they (The Angel Investors) think have a game changing idea. Moreover, Angel Investors in many cases are successful entrepreneurs themselves and hence, mentor the new entrepreneurs in the same way managers and role models mentor promising employees. It is also the case that in recent years, Angel Investors have invested nearly three times the amount of money as raised through venture capitalists.
Venture capitalists differ from Angel Investors in the sense that while the latter invest their own money and often do so for giving back to society, the former invest in new ventures with capital that their professionally managed investment firms have accumulated from private investors. In other words, venture capitalists often act as representatives of individuals and trusts with capital to spare and do so for profit oriented purposes rather than the for fun investments by Angel Investors.
Further, venture capitalists need a compelling business model and its presentation by the entrepreneurs as they are in the business of investing for profit and hence, need to generate returns on their capital.
This type of financing happens when the entrepreneur sells his or her stake in the venture to individual or a group of investors. However, buyouts are also used to refer to instances when private equity firms pick up stakes in new ventures where the majority stake is still with the entrepreneur. Moreover, buyouts are latter stage investments which mean that by the time the buyouts happen, the venture is already into its growth phase or in the process of being on the road to profitability. Having said that, it must be noted that buyouts also happen when the investors realize that ventures have good assets which can fetch returns as well as have the potential to grow and generate value in the future. Buyouts can also be hostile meaning that the entrepreneur might be forced to give up his or her stake in cases where the private equity or the other investors decide that a change of ownership would be good for the venture. Finally, buyouts happen when the venture is also in the process of winding up as some investors might want to pick up assets on the cheap and sell them off piecemeal.