subject: What Are The Benefits Of Equity Investments For Smes And Startups? [print this page] Are you looking for funding? Private equity investments generally include mezzanine capital, venture capital, leveraged buyouts, angel investments etc. Understanding Equity Investment There is a general misconception on what constitutes equity investments. In reality, private equity includes sources of funding as wide as angel investments, venture capital etc.
However, most of these investments are undertaken in assets that cant be traded freely on the stock exchange. But each of the varying kinds of equity has their own merits and demerits. Angel investments and venture capital are most often associated with early stage businesses. They mostly invest in startups and small businesses. On the other hand, mezzanine equity is often associated with large or midsized companies.
Mezzanine equity investments are meant for acquisitions, growth, new products or services, innovation etc. Such equity is targeted at helping established business undertake further growth investments. Generally, equity investors go for struggling businesses or companies. Investments include a complete or leveraged buyout, where the struggling firm is taken over by the investors. The aim is generally to bring the business back on the path of growth and success and dispose it off for profit.
The disposal can be done through a sale of stake or relisting or through an initial public offering (IPO). So, How Does It Work? Here is how private equity funds work. It all begins when a number of wealthy individuals come together to create a firm. This firm becomes a vehicle for investments in worthy business financing deals.
The firm draws its base capital from the participating investors. As such, the investment vehicle is set up as a limited partnership. The company becomes the general partner in the fund, while the participating investors are limited partners. However, the limited partners or participating investors have little control over the company. Whenever the company (general partner) finds a worthy investment, the investors are called upon to provide the financing.
The company is also responsible for developing a portfolio for the partnership. Equity firms generate profits for investors from sales, mergers, IPOs, recapitalization, re-listing etc. Equity financing deals are generally long term investments. The Benefits Of Equity Financing What are some of the benefits of equity financing for small businesses? Finding financing for small businesses and startups isnt an easy undertaking.
This is mostly because their business models and products or services are untested. But as every startup owner knows, equity financing makes a lot of difference when starting out. On the same vein, midsized businesses also need extra equity support for growth and investments. One of the major benefits of private equity for businesses is the fact that both profits and losses are shared. Unlike traditional loans, you dont have to suffer the losses alone. The investor becomes a shareholder in your business and partakes of the good and the bad!
Extra financing is also necessary for businesses to expand their working capital. The returns expected by investors may be high, but their long term investments are worth it. For small businesses and startups, this long term financing is crucial for sustenance and success. Of course you can always bootstrap, but every entrepreneur succeeds in that approach.
