Angel Investors
Angels are generally retired executives who invest their own money in young and/or growing companies, but like to have a say in business operations. They look for opportunities to add significant value and leverage to their investment dollars by using their contacts, industry knowledge or personal areas of interest. They can be great coaches and mentors, but unlike commercial cash sources, they’re investing their own money.
UPSIDE
- Equity capital from knowledgeable sources.
- They generally come with industry and related contacts.
- They generally insist on tougher corporate governance and stronger business processes.
- They usually offer excellent opportunities for mentoring and executive coaching.
DOWNSIDE
- They often have pre-formed opinions about how to grow your business that may not dovetail with your own.
- They can be hands-on partners, and if you’re not equipped emotionally for this, you’ll invite problems into the boardroom and corner office.
- With their requirements for belt-tightening and changes in business processes, you’re no longer the last word.
- Giving up equity can cut deeply into your returns if the business is only mildly successful.
Sophisticated Financial Partners
Private Equity Firms
So-called PE firms are great sources of growth capital, but most want to take equity and ownership control. They can be an excellent choice in a succession plan or to exit a business. It’s common for PE firms to rack up multiple players by targeting “fragmented” business arenas, those in which a given company isn’t much different from its many competitors.
PE firms often put their funds to work through such higher yielding instruments as mezzanine debt and equity. Again, they’re ultimately interested in gaining control of, or influencing, the exit of the business altogether.
UPSIDE
- As with angels, they can bring tremendous resources and contacts to help with sales, manufacturing, financing, communications and media relations.
- They have deep pockets to assist in difficult times as a company grows and experiences downturns in business or the economy.
DOWNSIDE
- They’re the most sophisticated financial experts on the planet and play for keeps. They generally invest for economic gain over time, and control or heavy influence. on the overall direction of the business and its exit.
- This is a succession-plan financing decision, so be prepared to let your baby go!
Venture Capital Firms
In recent years, VC firms have moved to investing in later-stage growth because of a backlog of companies looking for strategic exit strategies that don’t include IPO’s (see below). They’re generally interested in businesses that have clear buyers, strategic investors or PE Firms as next-stage investors that might provide liquidity. But unlike other equity investors, VCs tend to specialize, investing only in business areas they understand and where they can have a heavy hand in getting returns on their investments.
UPSIDE
- Like angels and PE Firms, VCs bring tremendous resources and contacts.
- They have deep pockets and relationships they tap to keep you going.
DOWNSIDE
- They play for keeps.
- Serious financial risk takers, they expect returns and will change anything in the business to get them.
- They’ll insist on board seats, voting rights, influence on value creation and exit events, etc.
- They’re judged by their own investors on ability to turn their investment in you into a 30 percent+ internal rate of return (IRR). It can get pretty hot in the boardroom even when things are going well.
- You’re less important to them than the business itself – this puts you at additional risk.
Strategic Partners
These companies are interested in your company’s technology, team, customer base, geography, brand, differentiation, etc. They can provide significant funding, but often only with strings attached that may not be desirable in the long run. This is also the most common form of business exit – selling to a company or player in your space. The strategic partner might be a competitor, a collaborator, or a selling or manufacturing partner.
Identify these possibilities as early as possible in your business development. Extend yourself to these partners early on and, like banking relationships, be sure they’re part of your audience as you enter the market or increase market share.
UPSIDE
- They need your product or service.
- They’re less interested in return on their investment and more interested in what you can bring to their top or bottom line.
- They will be more forgiving on terms and valuation when negotiating the financing.
DOWNSIDE
- They could preclude a channel opportunity with another potential partner.
- They could deter an exit opportunity for you with one of their competitors.
- You may have to give up valuable rights to get their money.