Alternative venture capital options for raising capital for growth

Alternative venture capital options for raising capital for growth

Venture capital is a specific term that refers to funding obtained from a venture capitalist. These are professional serial investors and can be individuals or part of a company. Often, venture capitalists have a niche based on the type and/or size of the business and/or stage of growth. They will likely see many offers in front of them (sometimes hundreds per month), be interested in a few, and invest in even fewer. About 1-3% of all venture capitalist deals are funded. So with numbers this low you must be clearly impressive.

Growth is generally associated with accessing and conserving cash while maximizing a profitable business. People often see venture capital as the magic bullet that will fix everything, but it’s not. Owners must have a huge desire for growth and a willingness to give up some ownership or control. For many, the desire not to lose control will make them unsuitable for venture capital. (Getting this figured out early can save you a lot of headaches).

Remember, it’s not just about the money. From a business owner’s perspective, there is money and smart money. Smart money means it comes with experience, advice and often contacts and new sales opportunities. This helps the owner and investors to grow the business.

Venture capital is just one way to finance a business, and it’s actually one of the least common, but most often discussed. This may or may not be the right option for you (a discussion with corporate counsel can help you decide which path is right for you).

Here are some other options to consider.

Your own money – many businesses are financed by the owner’s own savings or by money derived from equity in a property. This is often the simplest money to access. Often an investor would like to see some of the owner’s equity in the company (“skin in the game”) before considering an investment.

Private capital – Private equity and venture capital are pretty much the same, but with a slightly different flavor. Venture capital is usually the term used for an early stage company and private equity for later stage funding for further growth. There are specialists in every field and you will find different companies with their own criteria.

F F F – Family, friends and fools. Those who are closer to the business and are often not sophisticated investors. This kind of money can come with more emotional baggage and interference (rather than help) from its suppliers, but it can be the fastest way to access smaller amounts of capital. Often multiple investors will offset the total amount needed.

Angel investors – The main thing business angels differ from venture capitalists in their motivations and level of involvement. Often, angels are more involved in the business, providing ongoing mentoring and advice based on experience in a particular industry. For this reason, matching angels and owners is critical. There are significant easily detectable networks of angels. Pitching to them is no less demanding than pitching to a venture capitalist, as they still sift through hundreds of pitches and only accept a handful. Often the requirements around exit strategies are different for an angel and they settle for a slightly longer term investment (say 5-7 years compared to 3-4 for a venture capitalist).

Launch – organic growth through reinvestment of profits. No external capital was injected.

banks – banks will lend money but are more concerned about your assets than your business. Expect to personally guarantee everything.

Rental contracts – it can be a way to finance specific purchases that allow for expansion. Typically they will be leases on assets and secured by those assets. It is often possible to lease specialized equipment for which the bank would not lend.

Merger/acquisition strategy – you may want to acquire or be acquired. Usually even a merger has a stronger and a weaker partner. Combining the resources of two or more companies can be a path to growth – and when done with a company in the same business, it can make a lot of sense – at least on paper. Many mergers suffer from cultural differences and unforeseen grievances that can kill the benefits.

Inventory financing – specialist lenders will lend money against inventory you own. This may be more expensive than a bank, but it can allow you to access funds that you might not otherwise have.

Receivables financing / factoring – again a specialized area of ‚Äč‚Äčlending that can allow you to tap into a source of funds you didn’t know you had.

IPO – this is usually a strategy after some initial capital raising and proven business viability through experience development. There are different ways to “list” in Australia. They are useful for raising larger sums of money ($50 million and above), as the costs can be quite high ($1 million more).

MBO (management buyout) – This is more of a late-stage strategy than a startup funding strategy. Essentially, the debt is raised to buy out the owners and investors. Often this is a strategy to regain control from outside investors or when investors seek to exit the business.

One of the most important things to remember about all these strategies is that they all require a significant amount of work to work – from the way the business is structured to the relationships with staff, suppliers and customers – you have to be researched and maintained so as to make the company attractive as an investment proposition. This maintenance and de-risking process can take anywhere from three months to a year. It is often expensive both in actual costs (consultants, legal advice, accounting advice) and in changing the focus of the owners from ‘sticking to the knitting’ and making money within the business to a focus on how the business is performing.

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