Equity Capital Financing

The founders can use internally generated cash and loans to expand the enterprise to a size that, to
them, is manageable and satisfactory

Firms with broader opportunities for growth must at some point seek equity capital from outside
investors.

Equity capital provides:

 rights of ownership
 ownership interest in the assets of the enterprise
 a share of its future fortunes
 a voice in how the business should be run

To avoid or delay the necessity of using outside equity capital:

 Rely as heavily as possible on bootstrap financing. This type of financing doesn’t force you to
give up ownership.
 Manage growth at a pace you can handle with existing financing.
 Be tightfisted with the money you have. Keep expenses low, and find every opportunity for
doing more with less
 Outsource nonessential functions whenever possible.

Types of Equity Capital Financing

Series A round of funding (seed stage) you may need to raise more funds, often from angel investors.
Series B round of funding you’ll need yet more funds, you’ll probably turn to venture capital.

Angel deals represent less in dollars than VC deals do, approximately $24.1 billion and $48.3 billion,
respectively, in 2014, but angels dwarf VCs in the number of deals per year, 73,400 versus 4,356.

Angel Investors

Who are Angel Investors?

High-net-worth individuals are usually successful businesspeople or professionals who provide early-
stage capital to startup businesses in the form of either debt, equity capital, or both. These successful
businesspeople can also offer advice and feedback and valuable local networks.

Types of startup and early-stage firms financed by Angel Investors:

 too small to get the attention of VCs
 too limited in their revenue potential at maturity to interest VCs
 too risky for bank loans and for most VC

Companies that began with angel investments include Google, Amazon, Starbucks, and PayPal

There's an estimate of three hundred thousand business angels in the United States.
In Europe, the Angel Investors' total market doubled between 2011 and 2016, and in Canada, it tripled.

Connecting with angels

Angels do not advertise themselves and keep their investment activities to themselves and their circle
of trusted associates.
 Join the online platform AngelList
 Angel Capital Association website provides a directory of angel groups and platforms by
region
 Find a way into their network
Angel groups and networks
Business angels traditionally have operated individually or in small and informal groups that are now
giving way to more formal organizations and networks.

Advantages of Angel Networks

  more efficient
 more depth and breadth in their expertise
 more investing power
 make the task of finding and contacting a potential financier less time-consuming and less hit-
or-miss for entrepreneurs.
Disadvantages of Angel Networks
 more bureaucratic and make decisions less quickly

How to obtain Angel funding:

 Target angels in professions related to your enterprise.
 Have your act together (a working prototype or, at a minimum, a rock-solid business plan.
 Have a well-rehearsed, right-to-the-point verbal presentation
 Have a credible exit plan for them
 Focus on your team, the investors weigh founders’ trustworthiness and character over their
competence

Venture capital

VCs typically take a significant percentage of ownership of the business and a position on its board and
take part in the strategic management of their fledgling companies. They also provide useful advice and
networks

A good VC firm has the sophistication, connections, and experience to get an IPO off the ground and
on terms that maximize shareholder value

VCs seek out small firms that have the potential to return ten times the investors’ risk capital within
five to ten years

First rate person with a good idea is far more attractive than a good idea with second-rate management

In the investor’s mind, high risk and illiquidity are offset by high potential payoffs

Less than 1 percent of US companies have raised capital from VCs.