Startup Fundraising – Do You Know Who You Are Talking To?
Venture capital, private equity, mezzanine debt, venture debt, angel money, investment bank? What’s the difference and who are the players? Many people start looking for funding and become involved with investment bankers or business brokers without really understanding what they are looking for or who they are talking to.Venture Capital Venture capital firms (VCs) raise money from limited partners and invest the money in companies for a share of the ownership. This is not so different than investing money in the stock market: you buy shares and have a say in how the company is run (abet a tiny say – that’s what the proxy is for). With VCs, it’s a private transaction and they require a significant amount of control. They are, however, not interested in running the business on a day to day basis.
Angels are individuals who invest their own money in a company for a share of the company. The amount of control the angel wants usually depends on the sophistication of the individual and the interest he or she has in being involved in the company. Some angels will invest and come in as management, some will invest and stay very hands off in the management of the company.
Technically, private equity is any ownership stake purchased through a private transaction, which includes VCs and angels. However, as the private investment market matured during the dot.com era, private equity has come to mean late stage companies that invest large dollars for a significant stake with the intention of preparing the company for a future IPO or sale. This term also includes leveraged buyout firms.
Venture debt is a funding source that does not require an ownership stake in the company (although they do normally want warrants). Similar to venture capital, it is for early stage companies that are interested in funding expansion. They require a high-interest rate and some control over the company, usually in the form of covenants.
Like private equity, mezzanine debt tends to be for more mature companies. The interest rate is usually high and warrants are usually required. Mezzanine debt will be subordinated to bank debt, but will have a claim on the assets of the company senior to the shareholders.
Contrary to their name, investment banks neither invest nor do they lend. They are interested in transactions between companies and initial public offerings. They use their knowledge and experience to market the company to the public and to other banks (who will then sell the shares to investors) and are paid a fee for this service. In general, investment banks are intermediaries and not interested in holding ownership stakes themselves.
Like an investment bank, business brokers are not interested in investing money. They are interested in finding a buyer for your company. They usually have numerous industry contacts and have a good understanding of the value of the company and what are current purchase structures.
If you have decided that it is time to raise money for your company, you must decide what you want ultimately. If you are ready to get out of the business, you want an investment bank or business broker. If you are planning on taking your company to the next level and growing it to an IPO, then you are probably looking for venture capital or some sort of debt. If you are interested in reading the company for a big sale, then you may be looking for a private equity firm. Understanding what you want is the key to getting the most value out of your company.
Ms. Worrall is the President of Worrall Consulting, LLC. Worrall Consulting, LLC is a finance and business strategy consultancy providing professional services to high growth, early stage companies.