As an entrepreneur looking to start a new business in the United States of America, you have probably heard the term private equity or private equity firm and wondered what it is, or whether it can help you launch your new business. Simply put a private equity firm, are types of companies in which third party individuals invest their money into and the private equity firm in turn invests that money into another business, typically to either own that entire business or a share of it.
Private equity firms come in a range of different sizes and typically the largest of these firms will only be looking to invest a lot of money into the largest of business such as high street chains looking for funding. However, entrepreneurs in New England and all across the US looking for investment for their business start-ups may find that the smaller private equity firms may be interested in smaller investments although it can be a long-time consuming process and difficult to find a private equity firm that will invest.
There are a number of reasons why a business may look to raise money. For some start-ups the entrepreneur may have a good idea but lacks the cash to get the idea off the ground. Often this form of illiquid business is why management teams will look to bring in outside investors to help fund the initial start-up costs. This can be to help pay for real estate or to fund tooling machines to build a product. There are a wide range of reasons why businesses need outside investment in the early stages.
Various types of private equity are also used to help a business grow. For many businesses the cash flow of the business in the early years can be caught up buying stock and funding the general running costs of the business. When a business’s cash allocation is forced to focus on these areas it can be difficult to grow and expand the business. Real estate, staff and product development can cost a lot and to expand money is needed.
Finally, one last reason why a business may look to private equity to fund their business is because they need to carry out debt financing. Often, a viable business can get itself into debt with suppliers or the bank and repayments can be crippling. Often a business may prefer to release some equity in their business in return for debt financing.
Whilst private equity firms may offer some entrepreneurs a solution to funding their business start-ups, others may prefer to deal with individuals instead of these kind of portfolio companies. Therefore, private investors, also known as Angel Investors, may be the perfect solution.
Whilst in many ways a private investor may operate in a similar way to a private equity fund, there are some advantages with using a private investor instead. For example, some private investors are happy to have a more hands on approach and can provide valuable industry experience to a new business. Whilst some business owners may not appreciate this and think of it as meddling, other entrepreneurs welcome all the advice and help that they can get.
Private investors are also in the position to act faster than a private equity firm, which can help a business start-up, get underway quicker, especially important if the business has time critical products or services.
Private investors are much more likely to want to invest in early-stage companies than institutional investors, private equity firms and venture capital companies. Generally, these companies and funds prefer to invest in established companies that are looking to grow to the next level, for example a firm moving towards an initial public offering (IPO) on the stock market. For many companies listing on the stock exchange, allowing public equity to fund a business is the ultimate goal and this is where fund managers, hedge funds, investment funds, pension funds and investment professionals all become interested in the company. At this point angel investors and many private investors become less interested in the offering because the potential return typically starts to reduce.
Private investors tend to take more risk and are willing to get in early to maximize their profits. They use these business tactics as high return investment strategies and understand that as an investment vehicle they can be much more turbulent, but the upside is very attractive.
The return on investing in start-ups is often much greater than could ever be possibly achieved from the interest rates available at the bank, or through investing in public companies in the public markets. Other investment opportunities that have the potential to offer a very high return in a short space of time is real estate investment. However, this alternative investment area is very popular and there is a lot of competition for properties so value creation via this method has become harder with margins cut. Developers can typically make money quite quickly, but as a private investor that is looking to buy and sell property to make gains, then this can be a longer-term investment and is also dependent on market conditions.
Another form of private investor that a business might come across is an accredited investor. This is a special type of investor that generally either earns a lot of money or has a high net worth. Depending on the country that they are based defines their status as this kind of investor.
For entrepreneurs looking to start a new business, it is important for them to explore all the options for business finance, from investing their own personal money, to private equity firms and private investors. By weighing up the pros and cons of each private companies can then and only then decide which method is right for them and their new business.
If you are looking for a private investor, then it is a good idea to ensure that you both have a good understanding of the valuation of your offering and what equity (if any) you will be releasing for the investment. You will need to do your due diligence to ensure that the deal is good for both parties.
The Angel Investment Network connects entrepreneurs together with high-net-worth investors looking to fund businesses in New York to San Francisco and all over the United States and beyond. Because we care a global network you can find funding for your business in the US locally but also overseas.
AIN helps investors and entrepreneurs build lasting and profitable relationships to build better businesses and brighter futures.