Alternative options to venture capital to obtain growth capital
Venture capital is a specific term that refers to financing obtained from a venture capitalist. These are professional serial investors and can be individuals or part of a company. Venture capitalists often have a niche based on the type of business or size or stage of growth. They are likely to see many proposals in front of them (sometimes hundreds a month), become interested in some, and invest in even less. Around 1 to 3% of all transactions made to a venture capitalist are financed. So with the numbers so low, you must be clearly impressive.
Growth is often associated with accessing and conserving cash, while maximizing profitable business. People often see venture capital as the magic bullet to fix everything, but it is not. Homeowners must have a strong desire to grow and a willingness to relinquish ownership or control. For many, not wanting to lose control will make them a poor choice for venture capital. (If you figure this out early on, you could save yourself a lot of headaches.)
Remember, it is not just about money. From a business owner’s perspective, there is money and smart money. Smart money means it comes with experience, advice, and often contacts and new sales opportunities. This helps the owner and investors to grow the business.
Venture capital is just one way to finance a business, and in fact it is one of the least common, but most frequently discussed. It may or may not be the right option for you (a conversation with a corporate advisor could help you decide which path is right for you).
Here are some other options to consider.
Your Own Money – Many businesses are financed from the owner’s own savings or money taken from the equity in the property. It is usually the easiest money to access. Often times, an investor would like to see some of the owner’s fund in the business (“skin in the game”) before considering investing.
Private capital – Private Equity and Venture Capital are almost the same, but with a slightly different flavor. Venture Capital tends to be the term used for an early stage company and Private Equity for a later stage financing for further growth. There are specialists in each area and you will find different companies with their own criteria.
FF and F – Family, friends and fools. Those closest to the business and often unsophisticated investors. This type of money may come with more emotional charge and interference (as opposed to help) from your providers, but it may be the fastest way to access smaller amounts of capital. Often several investors will make up the full amount needed.
Angelic Investors – Top business angels differ from venture capitalists in their motives and level of involvement. Angels are often more involved in the business, providing ongoing mentoring and advice based on experience in a particular industry. For that reason, matching angels and owners is critical. There are important networks of angels easily located. Introducing them to them is no less demanding than a venture capitalist, as they still go through hundreds of proposals and accept only a handful. Often times, the demands around exit strategies are different for an angel and are satisfied with a slightly longer term investment (say 5-7 years compared to 3-4 for a venture capitalist).
Bootstrapping – grow organically by reinvesting profits. No external capital is injected.
Banks – banks lend money, but they are more concerned with their assets than with their business. Expect to personally guarantee everything.
Leases – This can be a way of financing private purchases that allow expansion. They will normally be leases on assets and will be guaranteed by those assets. Often times, it is possible to lease specialized equipment that a bank would not loan.
Merger / acquisition strategy – may seek to acquire or be acquired. Generally, even a merger has a stronger and a weaker partner. Combining the resources of two or more companies can be a path to growth, and when done with a company from the same business, it can make a lot of sense, at least on paper. Many mergers suffer cultural differences and unforeseen hard feelings that can wipe out profits.
Inventory financing – Specialty lenders will loan money against your inventory. This can be more expensive than a bank, but it could allow you to access funds that you might not otherwise have.
Accounts receivable financing / factoring – again, a specialized area of loans that can allow you to access a source of funds that you did not know you had.
IPO – This is normally a strategy after an initial capital raise and after having proven that a business is viable through the development of a track record. In Australia there are several ways to “list”. They are useful for raising large amounts of money ($ 50 million and more) as the costs can be quite high ($ 1 million more).
MBO (Purchase by Management) – This tends to be a later stage strategy, rather than a seed funding strategy. In essence, debt is generated to buy from owners and investors. It is often a strategy to regain control from outside investors or when investors seek to divest from the business.
One of the most important things to remember in all of these strategies is that they all require a significant amount of work to work, from the way the company is structured to the relationships with staff, suppliers and customers, they must be examined. and conditioned to make the company attractive as an investment proposal. This process of preparing and eliminating risks can take anywhere from three months to a year. It is often costly both in actual expenses (consultants, legal advice, accounting advice) and in shifting the focus of owners from “sticking to the fabric” and making money within the business to a focus on how the business is presented.