Investors for Every Lifecycle Stage of Your Company
Searching for investors is a critical yet tedious task. Finding someone with shared values and perspective about the future of your company may not always meet the expectations of your targeted profile. This week we will clarify the different types of investors that can match the different evolutionary stages of your company.
Seed capital – is about betting on a business idea. This is the launching stage of your company. At this point, there is still a little-to-no business structure. A new business idea is usually the result of a interest, fascination or obsession of an entrepreneur. During this stage, the most common solution of finding an investor is referring to family and friends, or people who trust the founders and believe in their ability to make the company work. They are your best choice because they are aware that it is quite difficult to find an investor.
Start-ups – companies that are in the first stage of their operations. These companies are often financed by their founders as they attempt to capitalize on developing a product or service for which they believe there is a demand. Due to limited revenue streams and high costs, most (around 90%) startups fail before entering the next stage of business development. In a case where the founders are unable to fully finance the project but are able to provide an enticing, strong and well-presented business plan, a potential investor, such as Angel investors, might be able to help.
Angel investors – individuals who commit to investing (around US$ 200,000 – 1,000,000) in early stages of new companies. They do so to help their portfolios become more diversified while helping entrepreneurs get enough funds to support their growing company. It is common to witness some public venture capital funds opting to join venture schemes with networks of Angel investors. By doing so, the venture capital firm can contribute funds up to a specific amount, to accompany the money invested by the Angel investors. In the end, by relying on the sector knowledge of Angel investors, the venture capital firm saves the cost of the project analysis.
Table 1 below portrays the hierarchy of potential investors based on the lifecycle stage of your company.
Table 1: Types of investors depending on the stage of the company
Source: ONEtoONE Corporate Finance
Growth capital – is a flexible type of financing used to finance the expansion and growth of a business. This way of financing can suit a growing company to extend the runway between rounds of investments. During this stage of development, the business structure is present, but the profit it generates is often less than required for further growth and in no terms ready to pay out dividends. This is a normal scenario, as the company has to spend money to push the product to the market. Therefore, the faster the growth, the faster the corresponding cost accumulation. This is particularly relevant to companies with a low percentage of sales profit, whereby the need for financing the growth is not covered by the generated profits. In this case, companies usually address private equity funds specialized in growth or/and family offices that invest in growing businesses.
Family Offices – is essentially an office created for the purpose of managing wealthy families’ assets. The family office is responsible for handling the family’s financial investments, real estate, businesses, taxes, and overall financial planning.
Growth capital is therefore vitally important for a newborn company with an established corporate structure to ensure the monetary seeding of a rapid evolution.
Leverage buy-out on mature companies – when a company’s growth trend steepens and becomes flatter, it enters the maturity stage of its lifecycle. At this point in evolution, the company can distribute dividends to its shareholders and acquires a sustainable profit generation. Venture capital funds specialized in buyouts are often on the lookout for such companies as they can take advantage of the company’s ability to get into debt so that they can offer a higher price to the seller. These funds try to allocate as little capital into the project and use debt as a financing tool instead, offering the acquired company’s projected future profits as a guarantee to the banks. It is therefore paramount that the cash flows are predictable and recurring.
Here at ONEtoONE, we consider every aspect and intricacy of the everchanging market environment in our valuation process and are known for our unique methodology for providing the best value for your business. If you want to learn more about who we are and what we do, please don’t hesitate to visit our corporate website or contact us directly via this form. In case you wish to learn more about the ways you can maximize the value of your company today, read our free e-book! It’s free.
Quemada Clariana, E. How to Sell Your Business: Keys to Maximize the Price of Your Company
Staff, I. (2018). Startup. Retrieved from https://www.investopedia.com/terms/s/startup.asp
What is Growth Capital? | Meaning & Definition. (2018). Retrieved from http://www.attractcapital.com/growth-capital-explained.html