NFIB

Understanding the Different Sources of Capital, Part II
10/ 01/ 2002

There are many different sources of capital--each with its own requirements and investment goals--discussed in this book. They fall into two main categories: debt financing, which essentially means you borrow money and repay it with interest; and equity financing, where money is invested in your business in exchange for part ownership.

Sources of Equity Capital:

Private investors
Many early-stage companies receive initial equity capital from private investors, either individually or as a small group. These investors are called "angels" or "bands of angels"--and are a rapidly growing sector of the private equity market.

Institutional venture-capital firms
Perhaps the best-known source of equity capital for entrepreneurs in recent years is the traditional venture-capital firm. These formally organized pools of venture capital helped create Silicon Valley and the high-technology industry, which is our nation's fastest-growing sector. But as you will see in Chapter 7, these funds do very few deals each year relative to the total demand for growth capital, so be ready to expand your horizons.

Mergers and acquisitions
Mergers and acquisitions (M&As) with companies rich in cash assets can provide a viable source of capital for your growing company. This kind of transaction triggers many legal, structural and tax issues that you as seller and your legal counsel must consider. There are more deals than ever among midsize companies due to the consolidation impact of technology, the "trickle-down" of the megamergers of the late 1990s and the need for midsized companies to remain competitive in an age dominated by megacompanies and small niche players.

Strategic investors and corporate venture capitalists
Many large corporations such as Intel, Motorola, America Online and MCI/Worldcom have established venture-capital firms as operating subsidiaries that look for investment opportunities (typically within their core industries) to achieve not only financial returns but also strategic objectives such as access to the technology that your company may have developed or unique talents on your team.

Overseas investors
A wide variety of overseas investors, foreign stock exchanges, banks and leasing companies are quite interested in financing transactions with U.S.-based companies. Consider cultural and management-style differences before you engage in any international financing transaction.

Intermediaries
Many growing companies begin their search for capital with the assistance of an intermediary, such as an investment banker, broker, merchant banker or financial consultant. These companies and individuals aren't direct suppliers of equity capital but often will assist the growing company in arranging financing through commercial lenders, insurance companies, personal funds or other institutional sources. Investment bankers will also arrange for equity investment by private investors, usually in anticipation of a public offering of the company's securities.

Andrew Sherman is internationally recognized as an authority on the legal and strategic aspects of entrepreneurship and business growth. As a senior partner with McDermott, Will & Emery, he manages a multi-million dollar corporate and transactional practice, representing Fortune 1000 corporations as well as hundreds of technology-driven, netcentric and rapidly growing businesses.

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