Startup Fundraising - Do You Know Who You Are Talking To?
By C. Worrall
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 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
readying 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.