The different equity options
You need financing for your business, but which type of financing best suits your needs? As indicated in theblog on the different financing mixes, there are several options for financing a business. One of these options is raising equity capital, whereby capital is paid into the business in exchange for an equity stake. There are various types of capital providers in the field of equity financing. Which type of provider is best for the situation of your company depends primarily on the life stage of the company:
For relatively young companies, informals are a common provider of equity. Informals usually come into play at €50-250k per investment. When banks or other lenders are unwilling to provide financing, for example due to the lack of a long track record, informals can be a solution. Informals are private investors, former entrepreneurs who generally want to invest their money in other companies after a successful period of their own entrepreneurship. They know the ropes and have a wealth of experience and knowledge, so they can provide relatively high added value to young companies and help them grow together.
There is also the option of raising equity capital through venture capital. This type of provider of equity capital is often found in promising companies with a limited size and unpredictable future that are somewhat further along in their life cycle. Venture capitalists generally make larger investments than informals. One can think of € 250,000 to € 1 million for the initial investment, which is often followed by one or two follow-ups. Venture capitalists expect the companies in which they invest to grow rapidly in a relatively short period of time, enabling them to achieve a return on their investment. Investments by this type of equity provider often have a term of 5-10 years, after which they sell their stake again.
Companies with a proven track record, clear scalability and growth strategy lend themselves to equity financing by private equity parties. Private equity parties are generally interested from € 500,000 to € 1 million EBIT (Earnings Before Interest & Tax). Specific standards or rules of thumb apply per sector. In general, these investment companies are characterised by their limited investment horizon of approximately 5-7 years. After buying a stake in a company, they want to accelerate the growth of the company and then sell it, for example, to a large strategic party. In doing so, they make their capital and extensive network available.