Putting up a business is a challenge. How much more running it? No matter what type of company you have — startup or established, it all goes down to your capability keeping it healthy, growing, and profitable. Thus, if you want it to prosper and not to crumble, you may want to dig into this article. We have provided comprehensible information on different types of capital funding which can help you manage your business and as well as expanding it.
Most of the time, private equity is mistaken as venture capital since both are all about investments and firms. However, they have a wide array of differences when it comes to the amount of money invested, sizes and varieties of companies bought, and distinct equity percentages in the businesses that they have invested.
For further understanding, let us dig deeper into private equity and venture capital’s overviews and processes.
Private equity, in the broadest sense, comes from investors — accredited or institutional — who can allocate a large amount of money on a long-term basis. It is a type of alternative investment which is made up of a capital that is not considered as a public exchange. Hence, it is consists of individuals that promptly invest their money in private businesses — or that participate in acquisitions of companies that are public— in which, as a result, deregistering of the public equity.
Thus, private equity is another form of private financing. Commonly, the firms and investors are of high net worth and enormous fortune. It is because the real aim is to make a direct investment in a particular business institution; hence, a large amount of capital is needed.
Private equity firms raise funds from different kinds of investors mentioned above. Thus, the main source of income for this type of firm are management fees. The cost structure for these firms usually differs, but they generally include both performance and management fees. For instance, a particular firm charges a 2% management fee on an annual basis for a managed asset while also asking for 20% of the income accumulated from the sales of a specific company. Moreover, after gaining a good amount of money, a fund will close down to new investors. Every fund is settled with a deadline that is no longer than ten years.
Venture capital is a category of private equity. It is a kind of financing that is offered by firms or well-off individuals to small or start-up businesses that have a high potential for long-term growth. The money is generated from big-time investors, banks for investments, and more. Furthermore, VC can come up in different forms such as managerial proficiency, technical competency, or monetary form.
When a venture capitalist or an investor tends to buy a share in a particular business, which eventually making this individual a business partner — that is when the VC investment is created. Moreover, this investment is also called risk capital or patient risk capital. It is because it comes along with the biggest nightmare of every business owner and investors: loss of money.
In searching for venture capital, the first thing that you should do is to hand over your company’s business plan. You can submit it to an angel investor or a VC firm. Due diligence must be performed by the interested investor afterward. The investor will have a thorough investigation of your business’ products, operations, management, business models, services, etc. If the due diligence is done, the angel investor or the firm will promise a capital investment in return for equity. The funds are either given in one blow or rounds. However, in most cases, VCs are provided in rounds.
The investor will eventually have an active — and crucial — role in the sponsored company by giving pieces of advice and checking the company development before handing over the additional money. Moreover, in about 4 to 6 years since the initial investment, the angel investor, or the investor firm departs from the company. It is done by establishing an acquisition, initial public offering, or merger.