Wednesday, December 12, 2012

Funding your Business Sources of Equity



Dave Archer
Let’s look at possible investors for your business.  The first two are within the reach of most businesses, while the latter two are options for a very specific - and small - group of businesses.  

Friends and family  

Friends and family are the low-hanging fruit of investors.  It may be easy to talk Mom and Dad, your siblings, etc., into investing in your business, and to do so with minimal paperwork.  If your business does not perform to plan, however, it's also easy to imagine the awkward discussions at the holidays when they ask about how your business - and their investment - is doing.

Crowdfunding

Crowdfunding looks to a large number of people - often strangers found via the Internet - to provide funding for your business.  Still in its infancy, two models of crowdfunding are evolving.  The first is reward-based, where people give you money in exchange for a gift or a product of some sort.  This model may also provide a way to estimate your potential market and perhaps pre-sell a large number of a new product. 

With the second model, people give you money in exchange for an ownership interest in your company.  Two caveats:  First, the Security and Exchange Commission is still setting the rules by which you can offer this type of equity. Second, each "owner," no matter how little they own, may feel entitled to your time via the phone or email.  You can imagine a worst-case scenario where you have a thousand "owners" vying for your attention.  Crowdfunding sites include www.kickstarter.com and www.crowdfundinglive.com

Angel Financing  

 "Angels" are individual investors who form investment clubs and look for LOCAL high-growth investment opportunities.  Given the need for high returns needed to offset the high risk of their investments, angels seldom invest in low-growth businesses such as retail or restaurants, but instead look for businesses likely to grow exponentially.  And, unlike the early days when angels invested in ideas, angel groups now look for businesses that are already generating significant revenue. Angels typically invest in the $100,000 to $1 or $2 million range.  For example, two groups in Northern Nevada that provide angel financing are the Reno Angels (www.RenoAngels.org) and the Sierra Angels (www.SierraAngels.com).

Venture Capital   

Venture Capital (VC) is the top of the equity food-chain, and is usually an investment fund pooled from sources of money such as high-net worth individuals, foundations, pension funds, etc.  VCs typically invest at least $1 million and look for established companies ready to take the next large step.  Like angel investors, VCs are looking for high-growth companies offering very high potential returns.  

Dave Archer is President and CEO of NCET - Nevada's Center for Entrepreneurship and Technology. Learn more about NCET at www.NCET.org

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