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It is very important that you know what venture capital is along with other financing terms if you are going to seek financing.  If you aren’t clear on the terms, you will not look like you have done your research and know what you are doing. This article explains some of the differences.

Do You Know What the Difference is Between Venture Capital, Private Equity, and Debt Capital?

By Ivan Faucon

Have you ever heard the terms “venture capital” or “private equity?” Well, if you are starting a business, you will need to know what kinds of investors you need to contact and the difference between venture capital, private equity, debt capital, and how investors are categorized. You will also need to know about what conditions different forms of capital is distributed to aspiring entrepreneurs.

Debt Capital

What is debt capital? Well, you can think of debt financing as a loan from a bank that you have to pay back with interest. In reality, that’s exactly what debt capital is. Many entrepreneurs often resort to getting some debt financing to start their business. Debt capital, depending on its size, can be obtained from your regular bank or if it is a large sum of money, you might have to go to a special bank known as an investment bank. As far as the investor who is giving you the debt capital is concerned, debt financing is a much lower risk investment compared to equity capital. This is because debt capital is funding that is lent to you, just like as if you are taking a loan out for a car or a mortgage on your home.

What is the interest rate on debt capital? In most cases, when in investor who invests debt capital to a budding company, he expects to make at least ten percent off of the sum that was invested into a given company. Furthermore, debt financing is usually given to those entrepreneurs, who the investor believes is most likely believes will pay the debt off in due time.

Equity Capital

Equity capital, on the other hand, is different because unlike debt capital; you do not need to pay anything back to the investor. Equity capital is funding that practically every company gains as its business grows. Equity is usually invested out of a particular fund and is classified as either private equity and venture capital.

Private Equity and Venture Capital

Basically, private equity is an equity fund that belongs to either privately owned institutions or private individuals. Usually private equity is invested by institutional investors, who are people that specialize in investing private equity from such institutions. Institutional investors usually work for a private equity or PE firm that manages private equity. Venture capital is also private equity but is managed slightly differently than private equity. Venture capital is actually private equity that is usually reserved for investments to companies that have the potential for high growth.

For those of you who need financing and do not want to have to worry about debts, you would like to have some kind of equity capital, be it private equity or venture capital. This funding is much better than debt capital, because unlike debt capital, you do not have to pay the investors back. Instead, with equity funding, an investor makes money when a company cashes out. This usually means that when a company is bought by another company or is prepared for public offering, that is when equity firms make their money. The other side of the coin, however, equity capital is a much more risky investment for the investor than debt financing, because with equity capital, an investor makes money only with a buyout, initiate public offering or IPO, or an exit strategy.

Investors

As mentioned before, there are different investors and investing institutions. Some investors are wealthy individuals who invest their own money to entrepreneurs whom they like, whereas others work for institutions, such as private equity or venture capital firms and invest money from their institutional funds.

Angel Investors

Angel investors are wealthy private individuals who invest their money into a given entrepreneur for whatever reason. Some angel investors invest in a particular company because they might like that particular entrepreneur or feels charitable and wants to share their own entrepreneurial experience with other budding entrepreneurs to get on their feet. Other angels might invest in a company because a particular company might fit into that angel investor’s values, ethics, or other personal interests. If you have a wealthy relative and he invests in your company simply because he wants to help out a member in his family, he is also an angel investor.

Venture Capitalists and Institutional Investors

Unlike angel investors, venture capitalists and institutional investors do not invest their own money. Institutional investors usually work for a private equity firm and invest equity from funds that are usually parts of a pension fund or other types of funds. Venture capitalists are investors who solely invest in venture capital and work for venture capital firms.

Where Does the Money Come From?

Well, that is a good question. In the case with most successful private equity and venture capital firms, the money for investments comes from venture funds that these firms have raised. When a venture capital or private equity firm is successful with their investments, they are able to raise new funds for future investments. Again, as mentioned before, equity investors cash in on their investments when a company is liquidated by either being bought out from another company, etc.

How Do You Contact Investors?

There are many ways you can contact investors, but any way you look at it, the task involves a lot of finger walking. There are directories available that can help you find investors easily. One of these databases is the VCgate Venture Capital Database, which can be found at www.vcgate.com.

Ivan Faucon writes about venture capital and entrepreneurs. He will also occasionally write about other business topics, such as consumer goods, jewelry, and internet marketing.

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Raising money  doesn’t have to be hard even in the economy we have today.  This article discusses some of the points to consider when preparing to raise money.

Raising Money For Your Business In A Troubled Economy

In a down economy, when raising capital to fund operations may seem like a Herculean challenge, convertible debt may present an attractive alternative to equity financing for early stage businesses and their prospective investors. Convertible debt financings may be applied in a variety of contexts and may avoid some of the cumbersome issues of early stage equity financings. Convertible debt financings may be an ideal investment vehicle for raising capital to fund startup ventures during the friends/family round of financing, especially in high-growth businesses where issues of valuation may prove particularly difficult.

Operating businesses may also use convertible debt financing (sometimes called “bridge financings”) to satisfy working capital needs between rounds of capital stock offerings. In this context, they are often viewed as providing a “bridge of capital” between rounds of equity financings and subsequent (often preferred) equity financings. In a typical convertible debt financing, the borrower issues convertible promissory notes to investors for a limited term. These convertible promissory notes often mature within one to two years from the date of issuance of the note. Parties commonly negotiate alternative structures relating to the note’s maturity, for example, providing for acceleration of the note’s maturity upon consummation of an equity financing.

Upon maturity or some other negotiated event, the note holder may have the option of calling the convertible promissory notes (with accrued but unpaid interest) or converting the convertible promissory notes into capital stock of the borrower based on a pre-determined formula. To compensate the investors for the investment risk they are assuming, convertible promissory notes are often secured against all of the assets of the borrower.

According to Louis R. Dienes and Ekong I. Udoekwere, convertible debt financings offer several advantages—and a few disadvantages—when measured against typical equity financings, including the following:
Cost-Effective and Efficient. Equity financings, particularly preferred equity financings, require the negotiation and documentation of a legally complex financial relationship between the business and its prospective investors, often including stock purchase agreements, amendments to charter documents setting forth preferred stock rights, shareholder agreements, voting agreements, registration rights agreements, and other documents unique to early stage equity financings. This translates into higher legal costs for businesses. On the other hand, convertible debt financings may eliminate much of the legal complexity and unwieldiness of equity financings, as well as the time required to negotiate and document such transactions.

The cost-effective nature of convertible debt financings often appeals to both early-stage businesses with limited capital resources and better established businesses looking to contain costs and access capital sooner. Further, because convertible debt financings are relatively common financing structures, they will not create impediments to future preferred.    –more

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“How Can I Get Money to Start My Own Business?”  That is a question that many people with an idea ask.  The answer can be very simple or very complex.

Here are a couple articles that strive to answer the question.

How Can I Get Money to Start My Own Business?

A very common question people often ask is how can I get money to start my own business? If you need to get money to start your own business there are a million ways you can go about it…

The first thing you might want to consider is what type of business you would like to start because the capital requirements and cost of entry to the market will vary from a few bucks a day to a few thousand or even more.

If this is your first business I would recommend that you find a niche or focus area that has extremely low overhead. Think about it, what would be cheaper to run a grocery store or a landscaping company? Well the two vary in the sense that you need to have a large inventory with the grocery store and with the landscaping company you only need to buy the necessary equipment and basic supplies like string for your weed-wacker and bags to place excess leaves and clean green materials.   –more

Where to Get Money to Start a Business:
10 Sources of Startup Funds for Microsized Businesses

Why don’t more people start their own business?

If you answered, “lack of funds” you’re right on the money.

In various ways, money – getting enough to start the business and worry about not making enough money to replace the income and benefits from a full-time job – is one of the biggest deterrents to would-be business owners.

Nevertheless hundreds of thousands of individuals start businesses each year. How do they do it? Where do they get the money to get started? Here are ten solutions for startup funding for a micro-sized business. Some are nearly risk-free. Others involve significant financial risk and should be used with caution.    –more

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Angel investors are an excellent source for funds if you have a business idea that needs funding.  The articles below discuss some of the benefits of using angel investors.

“Angel investors are becoming the dominant force in consumer internet venture capital”

Bill Burnham, hedge fund manager and former VC:
“Angel investors are becoming the dominant force in Consumer Internet Venture capital. The vacuum created by the withdrawal of VCs from traditional Seed and Series A opportunities in the Consumer Internet space has been filled by a motley collection of angel investors.

It is angel investors, not VCs, that are writing checks based on good ideas, business plans, and “alpha sites”; not VCs. The importance of angel investors is such that it is not unusual these days to see an internet startup publicly announce its round of angel funding, when in the past such events did merit a public mention. Yes, angel investors have always provided seed money, but they today they typically provide 100% of what was once considered Series A money as well.”    –more

What is involved in securing venture capital?

Entrepreneurs and business owners have great business ideas but often they do not have the capital to complete their transaction. They spend a lot of time searching for angel investors, seed capital, early stage financing, mezzanine financing. The cheapest way to start a business is to beg borrow from family, friends and use the equity of your house or credit cards. Although credit card interest rate is high, it is still cheaper than venture capital financing.

Venture capitalists are individuals or pools of funds looking for businesses which have an excellent opportunity of succeeding. They typically finance later stage businesses but there are some funds around who will invest in early stage businesses. Venture capital firms typically take an equity stake in the business, a board of director seat, a return on their loans which they want repaid and a percentage of the profits of the business.

Venture capital firms and angel investors take risks and for that they want to be rewarded very well. To compensate for their risks, they look for a high ROI (return of capital). For every 10 investments made by a venture capital firm, they are hoping that two will be extremely successful, a few will break even and they will lose their entire investment on 2. As a result, the ones which succeed must more than make up for the losses on the other investments. Venture capital firms will monitor the business closely and if the budgeted sales and expenses are not met, they will become more active in the business and could take over the business if the business deteriorates significantly.    –more

Related angel investors articles

• Angel Investments Take Time and Terms (startupprofessionals.com)
• Royalty-Based Venture Financing, Born in Boston, Could Shake Up VCs and Startups from New England to the Northwest. (xconomy.com)
• VC needs to leave the Internet (vator.tv)

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Venture Capital – Funding in the Recession

By Thomas Ajava

As you might imagine, the recession and implosion of the credit markets has had just a tad of an effect on the venture capital and angel investor markets this year. For those considering start-up businesses or expansion, the forecast is decidedly mixed.

I don’t have to tell you that the implosion of 2008 and 2009 resulted in the near strangulation of many niches of the financial markets. Oddly, venture capital investing was not one of those markets that was rocked to its core. Don’t get me wrong. Things were bad, but the downturn in venture capital investing was in the teens as a percentage instead of a much larger number as with most markets. Angel investing, sadly, was crushed for the most part with rates dropping by 30 percent or more.

Well, enough about the past. What about the future? After all, we’ve all read and heard we are now in a recovery from the Great Recession. To say it is a tepid recovery might be a mild understatement. The simple fact is the financial world is still at a stand still. For example, more banks have failed in 2009 than all of 2007 and 2008 combined. That doesn’t make for a solid platform from which to launch 2010. So, what can we expect?

2010 is going to be a brutal year for start-ups. Venture capitalists are risk adverse at the moment, which means few will be interested in taking on the risk of a brand new business. Unless you have a proven record turning start-ups into big winners, don’t hold your breath on VC funding. The same goes for angel investing. The year is going to be about family and friend investing or simply waiting until things turn in the venture capital markets.

What about existing businesses looking to take that next step? VC companies and angels are going to be much more receptive towards inquiries from companies that have a history. That doesn’t mean they will be handing over money right and left, but it means you have a chance. As usual, it comes down to whether your idea seems plausible to them at a time when things are very tough.

The venture capital markets are not dead. Not even close. That being said, there are a lot of fish competing for the food in that market. Things will eventually loosen up, but it may be some time before that happens.

Thomas Ajava writes about venture capital funding for VentureCapitalInvestmentFirms.com where you can find venture capital investment firms for your start-up or existing business.

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Related venture capital articles

• When To Raise Venture Capital (markpeterdavis.com)
• $5k to pitch your business? Who falls for this?? (sethlevine.com)
• Proto.in 7th Edition: Nominate your startups (trak.in)