At Equidam, our goal is to provide small business owners the tools to manage their business easily and grow their company properly. Today, we will start with a new Topic of the Month: Small Business Funding. Sooner or later, almost every business owner will encounter this challenge. That is, the process of raising funds. In the coming four weeks, we will discuss the major funding options with you, provide useful tips and discuss the pros and cons of each options.
Let’s kick things off with equity financing. Simply explained, it is a way of funding where you raise capital through the sale of shares in an enterprise. You sell a part of the ownership of your company, and in return, you receive money you can use for business purposes, like developing a new product or expanding your business overseas.
The first thing that likely comes to mind when you think of equity capital is the issuing of shares on the stock market. However, for private companies, equity financing is a useful way to raise capital too.
When looking for funding in the form of equity, you have several options.
Informal investors
Especially for startups, Venture Capitalists and Angel Investors are attractive options to raise money (learn more about the differences between VCs and Angels in this blogpost). If they believe in your startup and see potential for the future, they invest in exchange of ownership equity or convertible debt. Venture capital firms manage the pooled money of other people in a fund, while business angels often invest their own funds.
But how can you find these VCs and angels? Entrepreneur.com provides a list with the Top 100 VC firms focusing on startups in the US, and this website provides an overview of VCs in Europe. Finding angel investors can be more difficult. It’s important to have an extended network that you can consult, or look for Business Angel Networks- angel investors who work together.
Crowdfunding
With equity crowfunding, many people can become a shareholder of your company by investing a small amount of money. This form of financing is becoming more and more popular. It used to be associated with starting businesses, but now also established companies start using it. The advantage of crowdfunding is that ownership is dispersed: instead of one or two big investors who have a considerable influence on your business, there are many small shareholders. We will not go much deeper into this type of funding, as we have a separate blog post on crowdfunding extensively later on in this blogpost series!
IPO
When your company has grown large enough, you might start considering an IPO- Initial Public Offering to raise capital. Besides the large, most common stock market, there are some stock exchanges for smallcap businesses. This makes an IPO also attractive for small businesses. But, be careful, as going public has some major drawbacks!
Does equity funding fit the needs of my business? There are some good arguments why it might. A big advantage is that you don’t have the obligation to pay your investors back at a certain point in time. And, generally, they have the same objectives as you have, like business growth and increasing company value, which makes it easier to make decisions you’re both agree with. If you attract the right investors, they can bring their expertise and network to your business, where you can benefit from. Moreover, because your investors become shareholders too, you share the risk and liability of company ownership with them.
On the other side, when having multiple shareholders, you have to take into account their wishes and needs and you will lose some control over company, which means that the shareholders can partially influence management decisions. Equity funding can be a time consuming process; as well as obtaining the capital as keeping your shareholders up to date and this might obstruct you from focusing on your core activities.
Potential investors want to know where your company stands and where it is heading! Equidam Valuation report presents a complete financial picture of your company!
Next week we will discuss funding opportunities from a different perspective: debt! Curious which financing source is more suitable for your business? Stay tuned, and find out soon!