Equity refers to capital that participates (to the extent of shareholding) in the profits or losses. Equity in many times is looked at capital that is priced at least 15-20% returns per annum . Sources of equity include
1) Family and friends
Entrepreneurs raised capital from their personal networks. Generally, family and friends have been a source of startup capital for several entrepreneurs. One need not raise only equity from Family and Friends, but one can also take debt from them.
2) Entrepreneurs can raise capital from personal loans and then invest that capital into the company
Entrepreneurs can raise loans personally from their credit cards or by taking a personal loan from a bank. These monies can then be invested into the company. However, one should bear in mind that these loans usually have high interest rates.
3) Promoter financing
There are some lending firms who provide loans to business owners by taking the entrepreneurs’ share ownership and other personal assets as collateral. This source of capital is usually available to large companies. After getting this capital, the entrepreneur can invest this as equity into the company.
4) Raise equity in lieu of investment in kind
There are entities that provide capital indirectly by providing capital ‘in kind’ rather than in cash. For example, some incubators provide rental space in return for equity. There are newspapers and celebrities that provide ad inventory in lieu of equity. If a business is anyways going to incur such expenses, then exploring these avenues will be a worthwhile option.
5) Angel investors
Angel investors are individuals who make personal investments into early stage companies. They invest in lieu of equity ownership into the company. Most Angel Investors are seasoned executives who can also be good mentors for the entrepreneur.
6) Venture capital funds
Venture capital funds provide capital to early stage companies. Most VC funds focus on technology companies and not so much on traditional companies but there are a few that have a focus on the latter as well.
7) Private Equity funds
These funds invest in privately held companies. The companies that usually receive interest from these funds are larger and are not in the startup category.
8) Family offices
Family offices are institutions that mange the wealth of an HNI or a wealthy family. Different family offices have different focus areas. Some family offices are open to investing directly into companies either at a startup stage or at a mature stage.
9) Buyout funds
Buyout funds are like Private Equity funds who specialize on buying out privately held businesses. However, their focus is on complete buyout and they usually invest in larger companies and not those that are in startup stage.
10) Strategic investment
Strategic investment refers to raising capital from a competitor or from another company that operates in a similar industry. This type of financing usually brings the highest valuation. On the flip side, this outcome generally means that the entrepreneur has to exit either immediately or after 2-3 years and transition the company ownership to the buyer.
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