When embarking on a new business venture or seeking expansion opportunities, one of the most crucial aspects is raising capital.
In the United States, entrepreneurs have access to a diverse array of capital-raising options. This article aims to provide a comprehensive overview of different methods of raising capital, including friends and family, angel investors and private funds. Let's dive in!
Friends and family
At the earliest stages of a company's life cycle, most entrepreneurs seek capital for their startups from their own savings, as well as from family and friends.
This kind of fundraising usually happens during the pre-seed or seed round and is based on the tight relationships with the founding crew. However, don't expect family and friends to drop strategic knowledge.They often invest straight up in the company, skipping fancy investment vehicles or funds. The investment could be in the form of loans, convertible debt, or even equity, depending on what the investors and the company agree on.
Now, here's the scoop: when it comes to looking into friends and family for investing in your business, they usually keep their noses out of the day-to-day grind. In other words, they won't be breathing down your neck or micromanaging your every move. They're more like the cool cheerleaders on the sidelines, rooting for your success without getting in your business. So, you'll still have the freedom to steer the ship as you see fit.
As for the size of these deals, they tend to be on the smaller side, ranging from $10,000 to $50,000.
Angel investors
Angel investors are like the superheroes of the business world, wielding their own stacks of cash to raise capital and support emerging ventures. These high-net-worth individuals are no rookies either – many of them are accredited investors with a solid background in entrepreneurship. You'll often spot them swooping in during the early funding stages, like seed and Series A rounds.
Angel investors are savvy, and they know that joining forces can pack a powerful punch. That's why they often form syndicates, combining their financial muscle to tackle larger investment opportunities while keeping their individual risks in check. It's a win-win situation. By pooling their resources, they can dabble in bigger deals with smaller investment amounts and limit their portfolio exposure. When it comes to specifics, investments can be either convertible debt or equity, depending on the preferences of the investor and company.
These angels can collectively provide anywhere between $200,000 to $400,000 per deal. In 2022, angel and seed investors made a record-breaking combined investment of $36.2B according to CB Insights.
If you're lucky enough to catch the attention of angel investors, get ready for a potential alliance that brings both firepower and financial expertise to the table. It's like having your own league of extraordinary business boosters in your corner.
Private funds
A private fund is a pooled investment vehicle—a fund created by an adviser to raise capital from multiple investors and who uses this capital to make investments on behalf of the fund. Private funds are often associated with:
- Venture capital (VC)
VC firms tend to invest in early-stage companies that are expected to grow rapidly, and usually have a specific industry focus. VC funds invest in companies across their growth life cycle, from Series A through their public offering. Many invest repeatedly in their portfolio companies when these companies seek to raise subsequent rounds of capital.
Just like their angel investor counterparts, VC funds may syndicate together with other funds during a funding round. Because of regulatory requirements, most venture capital investments are structured as equity, typically in the form of preferred stock.
VC investments have a long time horizon and are generally locked in until a liquidity event (such as an acquisition or initial public offering), when the VC fund and its investors hope to realize profits from their investment. Not only are VCs key allies when it comes to financing, but they open doors to a network of investors and customers, and they lend a helping hand in key personnel hiring. It's a dynamic partnership where VCs bring their A-game to empower their portfolio companies for success.
According to EY, although VC investments declined in 2022 from 2021´s record setting pace, it still surpassed the $200B mark.
- Private equity (PE)
A private equity fund is another type of private fund, managed by a private equity firm, which may be required to register with the Securities and Exchange Commission (SEC) as an investment adviser.
Private equity funds pursue a variety of investment strategies (for example, buyout, growth equity, and venture capital) to facilitate capital raise. A typical investment strategy undertaken by a private equity fund is to take a controlling interest in a portfolio company and engage actively in the management and direction of the business in order to increase its value. Some private equity funds may also specialize in making minority investments in fast-growing businesses or startups.
According to Statista, the top-5 largest private equity companies in the United States in terms of funding-raising capacity between 2017 and 2022 were:
- KRR ($126B),
- Blackstone ($82B),
- Thoma Bravo ($50B)
- The Carlyle Group ($48B) and
- General Atlantic ($45B).
- Hedge funds
Hedge funds maintain a diverse range of securities and typically exhibit more flexible investment strategies than mutual funds, and are associated with higher levels of risk. Hedge funds deploy a range of investment strategies, including:
- leverage, which involves borrowing funds to magnify their investment exposure (alongside the inherent risks) and
- short-selling, a clever tactic where they bet against the success of a particular stock—just one example of their adventurous and speculative investment practices.
Due to the high risk of hedge funds, the U.S. SEC places regulations on who can invest in them.
To invest in hedge funds as an individual, you must be an institutional investor, like a pension fund, or an accredited investor. Accredited investors have:
- a net worth of at least $1M (not including the value of their primary residence), or
- annual individual incomes over $200,000 ($300,000 if you’re married) - only about 4% of the US population, according to the US Census Bureau in 2019.
However, more people qualify now than was initially intended. In August 2020, the SEC allowed those demonstrating advanced investment knowledge (via certain financial licenses or work experience), to become accredited investors.
How can Finalis help?
As you can see, this snapshot reveals that there are numerous alternatives for raising capital, and the ones we've detailed here are not the only options. The topic is extensive, but having knowledge about it empowers us to make informed decisions. If you're currently on the path of capital raising, don't hesitate to reach out.
Finalis’ Connect platform provides networking opportunities that can assist you along the way. Connect with your future investors!
In our upcoming pieces we will explore alternative ways to raise capital such as: corporate capital raises, fund capital raises, EB-5 capital raises, and crowdfunding. Stay tuned.
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