Where does equity financing come from?

106 18 Steps for Starting Your Business
Where does equity financing come from?
As with debt capital, this type of capital can come from friends and relatives, from SBA licensed
investment companies, or from professional investors known as a "venture capitalists."
1. Friends and Relatives: Again, be reminded that mixing your friends or relatives
and your business may not be a good idea.
2. SBA licensed investment companies: The SBA also licenses Small Business
Investment Companies (SBICs). They make venture/risk investments by supplying
equity capital and extending unsecured loans to small enterprises that meet their
criteria.
The SBIC Program provides an alternative to bank financing, filling the gap
between the availability of venture capital and the needs of small businesses that
are either starting or growing. They use their own funds plus funds obtained at
favorable rates with SBA guaranties and/or by selling their preferred stock to the
SBA. SBICs are for-profit firms whose incentive is to share in the success of a
small business. The Program provides funding to all types of manufacturing and
service industries.
3. Professional Investors/Venture Capitalists: The venture capitalist is a risk
taker, usually specializing in related industries and preferring three to five year old
companies that have shown high growth potential and will offer higher-thanaverage
profits to their shareholders. These investments are often arranged through
venture capital firms that act as "matchmakers."
As risk takers, venture capitalists focus on and have a right to participate in the
management of the business. If the company does not perform, they may become
active in the decision making process. The most frequent question we get asked is,
"What is the standard amount of equity you have to trade for financing?" The
trade of equity for capital is based on supply and demand. In other words, the deal
is made according to who has the best bargaining power.
Venture capitalists also require the inclusion of an exit strategy in the company’s
business plan. The exit strategy lays out the future goals for the company and
minimizes risk to the investor by providing a way out if there is a strong indicator
that the business will fail to reach its profitability goals.
Tech Tip:
For more information on Small Business Investment Companies
visit the following web site:
http://www.sbaonline.sba.gov/INV/overview.html