Most small or growth-stage
businesses use equity financing in a limited way. As with debt
financing, most of the time additional equity comes from non-professional
investors such as friends, relatives, employees, customers or industry
colleagues.
However, the most common source of professional equity funding
is that group of investors known as venture capitalists. Venture
capitalists are institutional risk takers and may be groups of wealthy
individuals, government-assisted sources or major financial institutions.
Most specialize in one or a few closely related industries. The
high tech industry of California's Silicon
Valley offers many shining examples of capitalist investing.
While public perception of venture capitalists may be of deep-pocketed
financial gurus looking for "that hot new business" in
which to invest their money, in reality they most often prefer three-to-five-year
old companies that offer the potential to become major regional
or national concerns and return higher-than-average profits to their
shareholders.
Venture capitalists may scrutinize thousands of potential investments
annually, while investing ultimately in only a handful.
The possibility of a public stock offering is critical to venture
capitalists. Quality management, a competitive or innovative advantage,
and growth of the industry are also major concerns.
Venture capitalists differ in their approach to management of the
business in which they invest. They generally prefer to passively
influence a business, but will react when a business does not perform
as expected and may insist on changes in management or strategies.
Relinquishing some of the decision making and some of the potential
for profits comprise the major downside
to equity financing.
If venture capital financing still seems like the ideal source
of funding for your business, you may contact these investors directly,
although they are known to make most of their investments through
referrals. The SBA also licenses Small Business Investment Companies
(SBICs) and operates the New Markets Venture
Capital Program (NMVCP), which are vehicles for offering equity
financing. Apple Computer, Federal Express and Nike Shoes received
financing from SBICs at critical stages
of their growth.
Learn more about SBA's equity capital programs.
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