In part one of this series, we discussed the range of finance options that are available to company owners who want to raise cash fast, including secured and unsecured loans, peer-to-peer finance, invoice finance, trade finance, and leasing and hire purchasing.
While all these methods offer their own advantages, they reflect straightforward transactions; in other words, some much-needed money in exchange for the lender taking on a limited aspect of the risk.
Sometimes, however, it makes sense to bring specialist help and expertise into your business in return for an equity stake. Doing so can open new doors through access to new contacts, better skills, and a fresh perspective – as long as you are willing to give up some control in your venture, of course.
Rich Olsen, our fundraising expert from Pegasus Funding, has provided us with some of his thoughts on venture capitalism, angel investing and crowdfunding – three very viable yet very different means of generating new business opportunities by getting outside help.
Angel investors
Angel investors are often sought after in the early phases of a business’s funding journey. Much like venture capitalists (and as their name suggests), they can swoop in and provide vital cash in exchange for equity to help a company achieve its ambitious plans.
Unlike venture capitalists, however, angel investors don’t usually manage pooled funds. They tend to operate as individuals and invest their own money. They often fill the funding gap between the initial seed stage (where founders invest their own money or rely on friends and family) and later-stage venture capital financing.
Most suitable for: Entrepreneurs who know they will benefit from specific knowledge and experience from an angel investor, as well as an essential cash injection. Most angel investors are experienced entrepreneurs who have accumulated their own wealth and are now looking to diversify their own portfolios by backing startups with innovative ideas and great prospects. They usually have lots of advice and insights that they are willing to share as part of their agreement, not to mention access to their own networks.
Beware: Searching for the ideal partner may take time, and will likely disrupt your business activities in the meantime. Like any sensible investor, your angel will be looking for a demonstrable return on their investment over time. They want some kind of certainty that this is the right investment for them – and this means they will likely go through your business plan and financial forecasts with a fine toothcomb. So, be prepared to answer a lot of questions. Bear in mind, too, that most angel investors will be looking for a clear exit strategy once they have received a strong ROI; they are unlikely to stay involved in the business in the longer term, as they will want to move on to pastures new.
Crowdfunding
Crowdfunding refers to the method of fundraising for projects, ventures, or causes by collecting small contributions from a large number of individuals, typically via online platforms. It allows entrepreneurs, artists, nonprofits, and others to bypass traditional financing routes like banks or venture capitalists and directly appeal to the public for funding.
There are several types of crowdfunding models, including donation-based (contributors receive no financial return), reward-based (contributors receive non-financial rewards or early access to products) and equity-based (contributors receive equity in the company).
Most suitable for: Startups who want to raise capital from a diverse community of like-minded individuals who have a passion for their project. Crowdfunding is a low-risk strategy that can place any business owner in front of a large platform of investors. Money can be generated from multiple crowdfunding platforms and there are little to no restrictions as to how these funds can be used. Plus, crowdfunding is a great way to secure repeat investors who will be willing to fund future opportunities.
Beware: The crowdfunding market might be saturated with similar business concepts, so competition might be fierce. And if you don’t deliver on your funders’ ROI expectations, the reputation of your fledgeling business could plummet. Many crowdfunding platforms will ask that you have raised at least a third of the money you require from other sources before you sign up – and there will be a time limit on your crowdfunding campaign, which will inevitably put pressure on your project.
Venture capital (VC)
VC is essentially a form of private equity. Venture capital firms raise money from investors, investment banks, and financial institutions for organisations that have high growth potential, and ‘sell’ ownership positions via independent limited partnerships.
Most suitable for: Early-stage startup companies that want to access larger amounts of capital and are happy to offer ownership stakes to VC investors in return for a cash injection. The venture capital route is also ideal for business owners who recognise that they would benefit from the knowledge and insights of investment partners who have experience in their field.
Beware: Much of the risk lies with the venture capitalists themselves – but this is reflected in the price of the transaction. As the founder (or one of the founders), you will reduce your share in your own business by effectively ‘selling’ a percentage of it in return for money and/or expertise. Reassuringly, however, most VC firms will take a minority stake (less than 50% ownership).
If you are keen to raise funds for your business but are still unsure which method will best suit your circumstances and your goals, contact the team here at Dartcell for advice.