February 12, 2019
Equity Financing: Where for Art Thou?
I recently discussed different methods to look at financing various business situations. Debt financing, while possibly difficult to obtain at times, is very easy to locate—there’s a bank on every corner. Equity financing, however, can be much more difficult to locate, especially for the small to medium-sized business owner.
There are legendary tales of entrepreneurs with great ideas who found equity financing for their businesses and built great beanstalks to the sky and garnered golden geese. But where did they get the beans? Jack met the trader who sold him the beans on his way to the market, not at the market. Many entrepreneurs feel the same, as though those who provide equity financing are ephemeral beings who must be encountered by chance, as though in a fairy tale. Equity financiers are not characters in a fairytale, but they are harder to find and access than banks. Where should you be looking?
Look Under the Couch
The most common source of equity financing for small businesses is that which is closest to home: family and friends. The term “natural market” is one that sales organizations coined to refer to those people in your personal life with whom you could potentially do business. If you took a job as an insurance agent, for example, you would be encouraged to first approach your mother, father, brother, uncle and good friends to begin building your book of clients.
While on the surface this approach can seem exploitative, the reason so many companies train this way is because it works, and the reason it works is simple: trust. The biggest obstacle in any business transaction, but particularly in one as risky as equity financing, is trust. It’s a collapse in trust that collapses deals.
You may be thinking, “No one I know has a trust fund available to share.” Likely true enough, but while there may be few people in your close personal network to whom you could reasonably present a multi-million-dollar investment opportunity, many businesses don’t have capital needs that intensive in the beginning; for those who do the cost of big-ticket items like facilities and equipment can often be handled with debt. So, reaching out to investment-inclined people in your personal network can be a very effective way to go. Of course, such business can complicate personal relationships, but if you have someone who is able to finance your business, potentially interested in investment opportunities and is someone with whom you already have a significant degree of trust, that person could be a good place to start.
Look Up in the Sky
Most businesspeople these days have heard the term “angel investor.” This term refers to wealthy individuals who make a business of making equity investments in startups. Here, even in the very nomenclature of the business, we see references to supernatural beings. One does not simply stop in and see an angel at its office. An angel must be summoned through prayer, serendipity or choose to intervene in your mortal life of its own benevolence.
The truth is that people with money want to make more, and few investment opportunities provide as much potential for return as startups, and as such there are lots of people out there (many retired entrepreneurs in fact) who are willing to provide. Fortunately, while these folks can be somewhat difficult to locate, they do not reside on an astral plane. You can find angel investor “clubs” in many metro areas simply by looking online. Another great place to look for angel investors is through trade associations or community organizations; a quick call to your national trade association, economic development agency or even your local chamber of commerce could very easily yield a referral to a potential investor. Industry conferences and networking events can be great for this as well. Despite our electronic age, business is still done between people, so look to where the people with similar interests gather and you may stumble upon an angel.
Retrace Your Steps
If you’re looking for any type of vendor these days, you probably do one of two things: Either you get a referral from a friend or colleague or you look online. Either can lead you to potential equity investors, you just need to know what to search for.
Your fellow business owner friends or contacts likely once needed financing and may be able to point you in the right direction; it is always a good idea to ask someone who has been down the path before. If you don’t have such contacts, Google can be a good resource. Look for angel lists or clubs, business brokers (remember, selling equity is selling your business, even if you’re not selling all of it), and small- to middle-market investment banks. All these service providers can be helpful in matching you with that private equity money you need.
About the Author
Josh Fiorini is the former CEO of PTR Industries, Inc. He spent the first decade of his career in finance, holding positions as an equity analyst and portfolio manager before starting his own hedge fund. This experience, along with a deep background in manufacturing, banking and private equity, has made him a sought after contributor on numerous boards and discussion groups on political and economic issues for media outlets, corporations and community organizations. Fiorini currently invests his time and resources with non-profit initiatives and acts as a contributor and management consultant to various firms in the firearms industry as the founding and Managing Partner in the firm Narrow Gate Management