May 28th, 2007 / Written by David Isserman
When it comes to raising money for your business venture, there are a number of options available to you. I’ve listed out some different strategies and have included a few pros and cons for each:
Loans: Borrowing money from the bank, your friends, or your family can be expensive, but you won’t have to dish out much, if any, equity. Because your new company will be lacking in credit, most banks will require you to provide some form of collateral, which could include your house.
Best for: Those who are concerned about giving up equity.
Friends and Family: When raising money, always invite your closest friends and family to be the initial investors. Though this could be a burden if your company doesn’t see any success, your friends and family will ultimately give you more freedom than professional investors, such as venture capitalists or private equity investors.
Best for: Those who are bootstrapping their startup.
Angel Financing: Do you have an idea that requires a minimal amount of financing, but more than you can borrow from friends and family? With angel financing, companies can raise between $10,000 and $1,000,000 from strategic investors. Many times these investors will not only help you with your financing, but will also provide you with advice based on industry experience. To receive angel financing, you must complete your business plan and apply to angel investment networks. Many of these networks focus on certain industries, so best to research them before you blindly apply.
Best for: Those looking for money and limited help from investors.
Venture Capital: If you aren’t starting a technology, biotech, or life sciences related business, then don’t continue. Venture capital investors are interested in primarily aggressive growth businesses, such as the industries mentioned above. If you need a significant amount of money, then VC money would be ideal. Venture capitalists (sometimes referred to as vulture capitalists) will take a large portion of your business, but will provide you with enough financing to start and build your business. Expect to give up a board position, as the venture capital firm will delegate a representative (or two) to sit on your board and the firm will offer its human capital to help your company grow.
Best for: Those looking to raise over $1,000,000 in aggressive growth industries.
Private Equity: This strategy is really reserved for privately held companies that are already in revenue and needing additional capital for faster growth or acquisitions. Usually private equity investors are interested in companies that are seeking over $10 million in additional capital, but some boutique firms can help raise less. Most private equity firms won’t be helpful if you need less than $5 million. There are a number of prominent full and boutique firms in Manhattan, London, and Chicago. When deciding on which firm to approach, it’s best to research only those that invest in your industry.
Best for: Private companies seeking additional capital for aggressive growth or industry consolidation.
Private Placements: This financing strategy only works for companies that are already public. Typically, the company issues additional stock (yes, this dilutes your current shareholders) and sells this stock for the market price or at a slight discount if the stock is restricted for a year.
Best for: Public companies looking to raise limited amounts of additional capital.