Your business might be doing well, but you are interested in taking it to the next level. The problem? You lack the funds necessary to fuel your expansion plans. Welcome to the world of private capital—the golden ticket that could boost your business growth. According to data from the Global Private Equity Review, businesses, globally, raised over $595 billion in private capital in 2019 alone. This is clear proof of the crucial role private capital plays in driving business expansion.
Understanding Private Capital
Before diving into the details, you need to understand what private capital refers to. Specifically, in the domain of private capital markets, it references funds invested in businesses by investors outside of traditional banking and stock market avenues. Every industry can benefit from these private investments. From real estate and pharma to tech start-ups and food chains—private capital fuels companies across sectors.
The Allure of Private Capital
So, why should you consider private capital funding for your business expansion? Unlike loans or credit, which must be repaid with interest, private capital involves equity financing. This means getting funding in exchange for ownership shares of your company. Private investors not just bring in funds, but also offer strategic guidance and industry networks — making private capital far more than just money.
Types of Private Capital
Private capital comes in several forms depending on where your business is located on its growth journey. If you are at the startup stage, venture capital is most suitable as it deploys risk capital towards innovation-driven companies. Then there is growth equity for mature companies that want funding for expansion. And finally, for businesses undergoing a change or dealing with distress, there is special situations funding, like buyouts or distressed debt.
In the startup world, venture capital is a household name. Venture capitalists are professional investors who fund startups in exchange for minority equity and provide networking, mentoring, and strategic advice. They seek out highly scalable and potentially disruptive businesses to invest in, expecting a high return on their investments.
If your business is beyond the startup phase and has a solid operating framework in place, growth equity could be a great funding source. Growth equity investors typically look for businesses showing strong potential for scale and profitability. While they still take an equity stake, it is generally less than what venture capitalists command.
Special Situations Funding
Special situations funds assist businesses undergoing significant transitions or facing stress. The fund may invest in companies through leveraged buyouts, distressed debt, and even turnaround situations. They bring financial support and strategic insights to help businesses overcome their challenges and thrive.
Raising Private Capital
Raising private capital involves a series of steps that are crucial to understand before starting the process. Firstly, prepare an investment proposal that accurately represents your business and its growth plans. Then identify suitable investors for your business stage and industry. After this comes the negotiation phase followed by closing the deal with legal formalities and due diligence.
The Investment Proposal
An investment proposal is vital as it impacts how investors perceive your company. The proposal should include information about your business model, its competitive advantage, target market, revenue model, team expertise, and projected financials. A well-crafted proposal makes all the difference in securing funding.
Finding Suitable Investors
The next step is identifying suitable investors for your business. A venture capitalist may be suitable for a tech startup, while a real estate private equity firm looks for lucrative real estate deals. The choice of investor should align with your business needs and growth plans.
Once an investor shows interest in your business, negotiate terms. It is important to ensure the deal suits both parties. Factor in aspects like valuation, investment size, control rights, exit provisions, among others. Expert legal advice can be instrumental in guiding you through this phase.
Closing the Deal
After successful negotiations, it is time to close the deal. This involves signing agreements, conducting due diligence and finally transferring funds. Remember, the process can be complex and lengthy. Patience and transparency are crucial during this phase.
Your journey towards securing private capital funding could be a make or break deal for your expansion dreams. Understanding what private capital entails—from types of funding to finding suitable investors—can greatly boost your success chances. Private capital not only brings in the funds but strategic inputs and networking opportunities—all key ingredients to growth success.