Many topics in the world of entrepreneurship are difficult to understand. The ins and outs of the financial market place take time to learn, but once they are broken down they are fairly easy to understand. Putting these topics in Layman’s Terms is the most effective way to communicate the details. For most small businesses, finding capital to start your business is key. This is obviously the first step in progressing your business, you can’t go anywhere with no capital. Most entrepreneurs utilize business investors who will support their company idea in the early stage.
Recently I invested in an appliance repair and pressure washing company which had massive potential. They had already spread to covering three states and wanted to reach 5 more. I will let you guess which round I got in on based on the following information:
Angel investors are typically investors that attempt to take the company to the next level in the preliminary stages of a fully functional business. This model of investing usually results in the “angel” investor receiving a percentage of the ownership of the company in the future, if the company uses the investment money to make a turnaround profit. If this risk taken by angel investors pays off, an exchange is made for what is known as convertible debt, which is essentially a bill the business owner must foot to the investor. The payment is based on a valuation of the percentage the investor will receive of the investee’s margins – a concept known as ownership equity.
Venture Capital and Debt
A part of series funding, venture capital is the term for money given to a small company in the hopes of a return. The return they hope to achieve is known as the venture debt. With startup companies that receive a “seed” level investment, usually a piece cut out of the company’s ownership is the payment the investee will make to the investor as collateral. The company begins to grow, money is used to purchase equipment, office space, computers, laborers, etc, and the ownership equity begins to grow for the startup investor.
Series A, B, and C Funding
At this point in a period of investment development, things begin to get serious. Series A, B, and C funding are later stages of advertising, marketing, and business expansion. Funding for Series A involves investors, but typically these investors are associated with corporations or investment firms. Series A funders can act as angel investors, and angel investors can act as “Series A” type investors. Investments and their results are vastly different all across the board. Series B funding is the next stage of your investment opportunities. This stage is for majorly growing a business through large amounts of funding for advertising, equipment, multiple locations, and evolution of the company management system. This type of investing is reserved for companies which already have the ball rolling, so to speak. A smaller startup business might not get the same attention from investors at this level, because these investors are looking for large profit turnaround.
The intricacies of the investment market cannot be fully determined with such a brief overview, but the idea of taking investments is an important one to be familiar with for any small business owner looking to grow and expand their horizons.