How to Accelerate Your Business's Growth with Equity Financing

How to Accelerate Your Business's Growth with Equity Financing

"Businesses can raise capital and bring in industry expertise, advice and mentorship through Equity Financing. In exchange, they will sell part of their company to the investor."

Equity Financing is selling a part of your company to someone who provides funds for the business. You can use the funds to pay bills or fund a long-term project to grow the business.

Importantly, Equity Investors usually don’t require repayment if the business fails.

This article describes different types of equity investors and the pros and cons of this type of financing.

1. Individual Investors

These are often friends, family members or colleagues of the business owner. They may have limited amounts to invest and not have relevant industry experience or skills to provide guidance or contribute to the business.

2. Angel Investors

Angel Investors generally are prepared to take the risk of investing in the early stages of a business’s development. They may be wealthy individuals or groups with industry experience, and they bring insight, business networks and advice. They typically aim to make a 30 – 40% annual return on their investment over three to seven years.

SABAN is the South African Business Angel Network. It aims to increase the number of Angel Investors investing in South African start-ups.

The South African Investment Network links entrepreneurs to angel investors worldwide. You can pay to join this network.

3. Venture Capitalists

Venture Capitalists (VCs) are individuals or firms with substantial amounts to invest. They are looking for already established companies with excellent prospects for the future. They generally want a significant portion of the shares and are often involved in the day-to-day management and planning of the business.

They hope to make a return when the company gets big enough to sell shares on the open market.

SARS has a list of approved VC Companies for South Africa.

4. Crowdfunding

Crowdfunding is a way for startups to raise capital from friends and fans of their projects without going through the traditional financial system. Individual investors make small contributions via an online platform (e.g. SeedInvest, GoFundMe, IndieGoGo, Kickstarter).

5. B-BBEE Investors

The B-BBEE policy encourages businesses to empower black South Africans in various ways, such as ownership, management control, employment equity, skills development, enterprise and supplier development and socioeconomic development.

Investors who support and engage in activities that contribute to these goals are considered B-BBEE investors.

The Pros and Cons of Equity Financing

Pros:

  1. Access to significant additional capital with no repayment obligation
  2. Added industry experience, expertise, and mentorship, and access to business networks
  3. Shared risk – if the business does well, investors benefit from increased valuation; if it struggles, they share in the losses

Cons:

  1. The risk of giving up too much equity and losing control of your business
  2. Dilution of ownership – the ownership percentage of each shareholder decreases as more shareholders are added
  3. Profit sharing – founders may have to share a significant portion of earnings with investors
  4. Poor fit of the investor to the business and potential for conflict
Key Takeaways

Equity funding can be a powerful tool for small businesses. It brings much-needed capital into the company along with expertise and mentorship capability.

However, it comes at the cost of the founder giving up some company ownership.

Business owners should carefully weigh the pros and cons and consider their business goals, growth potential, and risk tolerance before pursuing this type of financing.

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