Capital Funding
Capital Funding
Capital Funding
Capital Funding
A review and comparison of Angel Investors,
Early and Later Stage Seed Funding Venture
Capitalists, Public Private Partnership,
Corporate Risk Capital Fund and
Crowdfunding
A review of the contemporary capital funding options and sources to support
businesses, enterprises and entrepreneurs at different stages of life cycle with a
comparative review of key indicators like size of venture fund, number of
investments, types of industries, types and sizes of companies invested in, major
factors for evaluating potential investments, valuation methodologies and
application procedure and financing types and success rates.
user
3/8/2015
Table of Contents
Introduction .................................................................................................................................................. 3
Crowdfunding ........................................................................................................................................... 4
Angel Investors.......................................................................................................................................... 5
Public Private Partnership......................................................................................................................... 6
Corporate Risk Capital Fund...................................................................................................................... 7
Early and Later Stage Seed Funding Venture Capitals .............................................................................. 8
Contemporary Financing Entities.................................................................................................................. 9
CircleUp ..................................................................................................................................................... 9
SierraAngels .............................................................................................................................................. 9
Finnvera .................................................................................................................................................... 9
Petra Capital Partners ............................................................................................................................. 10
Centripetal Capital Partners.................................................................................................................... 10
Comparative Statement .............................................................................................................................. 11
Conclusion ................................................................................................................................................... 16
Bibliography ................................................................................................................................................ 17
Introduction
Young entrepreneurs find it very challenging to get funding from contemporary financing channels and
institutions to finance their unique business ideas. Established financing institutions lack of interest in
exploring entrepreneurial potentiality have taken such a conservative form that newer breeds of capital
financing have emerged on the horizon over last few decades. Especially since the wide spread-out of
social media and people contacts over internet has made the growth of KickStarter, GoFundMe,
IndieGoGo etc as part of modern financing history. This paper describes such five capital financing
options for innovative business minded people, entrepreneurs and young startups with their instances
in detail.
Before moving to describe each financing options available to modern enterprises and entrepreneur this
would be essential to elaborate the development of such financing. Banks play traditional role of
financing to commercial and customer sectors however, they are more regulated and have operating
costs. Therefore they cannot always make quick investment decision or avoid their banking formalities.
For new startups and business concepts it is not always possible to offer collateral or share the
ownership. Again, there are individuals and business with myriad of idle money who are keen in making
short run investment to get number of times higher return. Such prevalence of business interests and
needs of capital financing and funding sector have contributed towards the development of newer types
of financing arrangements that bypass the traditional lenders and borrower concepts in principles.
Technology, market insight, business potentiality and other key elements have emerged up to be a
equally strong foothold for investment that traditional capital funding sources could not ignore. Given
the prospect of new forms of enterprises and financing needs newer range of capital funding and
financing options emerged in response to the growing demand for it. Angel investors, venture capitalist,
public private partnership, early and later stage seed funding financiers, incubators, microfinancers, etc
established themselves to be alternative financing sources for business. They have proved the worth by
venturing many global brands and have also witnessed incremental growth in their own business.
For enterprises and businesses the alternative capital funding sources have opened wide avenue in
funding to support them in taking risk, to grow and to exit safely. Businesses and enterprises are now
better protected and cared.
Crowdfunding
Crowdfunding stands for networking individuals who pour their money to support any initiative on
internet platform by any entity. It is an adapted form of crowdsourcing and differentiates itself by
focusing on the intent of the concept that to be funded through individual contributions. CircleUp stands
as one of the most popular crowdfunding service at the moment.
The term Crowdfunding was first coined by Michael Sullivan in 2006 in his famous fundavlog and since
then the concept of crownfunding kept evolving where by financing a project or venture by individual
monetary contribution of large number of people became to be its essential characteristics. Irrespective
of profit motive, the crowdfunding has been used to generate cash support and capital support for
projects, products, services, causes and enterprises and development organizations. Generally it
requires stake from three parties, the concept provider, the follower of the concept and a mediating
agency. Nowadays internet websites that work as crowdfunding platform are functionally playing the
role of mediator as an adaptation of the fund raising agents role. In 2013 the crowdfunding industry
grew to nearly 6 billion US$ venturing fund size with millions of individual monetary contributors behind
it.
Contemporary crowdfunding initiatives are of five types. The charity based crowdfunding gather funding
for a charity cause where investors ideally do not look for return from their investment and it works
more on donation principle. Another type of crowdfunding is legal in its jurisdiction it is called the
litigation crowdfunding where investors invest in legal battle for lawful rights claim. A legal recognition
in the case will offer some benefits for the stake holder investors. The third type of crowdfunding are
based on individuals borrowing requirements and terms. A person makes his borrowing appeal to group
of people and seek to get lenders bypassing the contemporary financial lending institutions and
channels. Once a group of investor accepts the borrower terms the funding occurs. Such crowdfundings
popularity is on rise these days. The fourth type is based on equity sharing and much related with
businesses, enterprises and entrepreneurs where a business seeks funding from others in exchange of
equity sharing. The last type of crowdfunding occurs on the basis of rewards but this is much limited to
creative fields and arts. A creative project gets initiated and looks for crowd funding from aspiring
investors.
Crowdfunding stands as the most popular form of venture capital funding source and arrangement and
have contributed to millions of businesses in different scales at different levels.
Angel Investors
In general terms Angel Investors are those individual or group of individuals who invests in start ups in
exchange of ownership stakes. Generally the angel investors belong to affluent class of people who can
decide to individually invest in any venture or form a group with other investors as angel investors group
to invest in relatively larger venture. In either cases, the angel investors get their right over the equity
stock of the business and enjoys debts convertible rights. There are networks of angel investors group
so if a group require funding or prefer to minimize risks on the venture it can seek more investment
from the network. For angel investors the sources of their funds can be anything starting from their
family heredity to proceeds from business.
A good aspect of angel investors venture up is that most of their seed funding to start ups across the
globe have proved successful and remained sustainable. Therefore whenever an angel investor is
approached by an applicant entrepreneur he needs to convince them in their terms. Generally angel
investors work as the alternative to contemporary capital funding sources and channels. It is rather seen
as the takeover of an entrepreneurs closer circle of people like friends and family with even better
financial proposition. Normally these funding ranges upto a few million while the same from the family
and friends could have reached a few hundred thousands only. The advantage is that the entrepreneur
gets better chance to manage his finance. The angel investors often run rounds of funding whereby it is
again possible for the entrepreneur to seek more funding from the angels. However, unless a business is
highly growing it is challenging to seek angel investors.
Dealing with angel investors can be compared as dealing with individuals since each angels terms of
funding is different and their interests and targets are also different. Some may decide to get ownership
stake while many can withdraw the fund in number of times after certain period. Opportunities for
entrepreneurs lie within the terms, negotiation and amount that they seek from the angel investors
because the angel investors usually do not hold any preference for industry association as they are
available in large numbers. What they count is how the money is being used and how much of money it
is going to create in return for the angel investors. No indefinite period of funding occurs here but if
required the angel investors can step up in supporting a venture with likely more funds. An ROI and IRR
of 20 to 30 percent is natural to bag an angel investor deal for any business. Prominent angel investors
who are already in venture financing would seek even higher returns like 10 to 20 times of their
investments. So, entrepreneurs must understand that angel investors can be a good source and an
expensive choice to deal with.
CircleUp
CircleUp is the crowdfunding platform that bridges nominated investors with innovative companies in
retail sector and the consumer. It is based on equity crowdfunding and started its operation in 2011.
Here the investors get equity right in exchange of their investments and therefore the materialization of
fulfilling the funding is much higher on this platform. Its investors are all accredited therefore the service
is highly popular among the fund seeker entrepreneurs.
SierraAngels
Established in 1997 in Nevada Sierra Angels are group of professionals and entrepreneurs who extends
financing support to start ups. However in addition to provide financing support the Sierra Angels also
provide mentoring and strategic guidance to companies. Entry to the group of investor in Sierra Angels is
based on invitation only. It has strategic affiliation with the Angel Capital Association and the Angel
Resource Institute therefore the invitation based membership here is of great value. Sierra Angels is
more concern over the innovativeness of business concept and emerging business sectors for funding.
Finnvera
Finnvera is a Finnish capital financing service that funds enterprises at growth, start up and for
internationalization. It has multiple arrangements like venture capital investment, export credit, loans
and domestic guarantees. It is run and managed by the State of Finland. Finnvera was founded through
merger of Kera PLC and the Finnish Guarantee Board back in 1999 and since then it operated in regional
capacity get preference over Finnish business, trade and commerce at Europe wide exporting. The
company grew exponentially in 2011 to have over 2 billion invested alone in exporting while the
company also managed to keep a stake of its presence in the financial sector by issuing 200 million Euro
worth bonds.
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Comparative Statement
Comparative Statement
Criteria
Crowdfunding
Size of Venture
fund
Number
of
investments per
year
companies
invested in
Angel Investors
Public Private
Corporate Risk
Partnership
Capital Fund
As of December 31,
2014 Finnvera has
over 2.8 billion
Euros outstanding
commitment
in
SME financing and
12.2 billion Euros in
export financing.
Currently there are
28800 customers.
Petra
Capital
Partners
can
invest upto 20
million US$ in
single
venture
from
the
companys own
capital however
where there is
more
growth
opportunity the
company
can
arrange for more
funding. At the
moment
Petra
Capital Partners
are running its
fourth round of
funding
worth
230 million US$.
Centripetal
Capital Partners
funds in multiple
stage therefore
it has different
investment size.
For instance, in
its each round of
funding it invests
from 1 to 3
million US$. For
a company in its
life time the
funding round
will
account
total 7 to 10
million US$ per
company. And
for acquisition it
invests 5 to 10
million US$.
There
is
no
complete figure
available
on
number
of
investments made
by Sierra Angels
per year however
its presentation
dinner is held at
every six weeks
interval
where
only
two
prospective
entrepreneur get
the chance to
make their case
for
capital
financing.
Over
2208
enterprises were
financed at growth
level and 3247
start up enterprises
in 2014 while the
SME financing was
1003 million Euros
and export credit
was 5034 million
Euros.
There is no clear
data of how
many
investments are
made each year
by Petra Capital
Partners but its
corporate record
shows that since
its inception the
Petra
Capital
Partners
have
invested
more
540 million US$
in
94
highly
growing
companies.
It makes 3 to 5
investments per
year.
CircleUp invests in
those companies who
are slightly little to be
approached
by
reputed
capital
financing companies
The
Finnvera
entrepreneur loans
are targeted to any
sector
except
farming,
realty,
forestry
sectors.
Petra
Capital
Partners
investment
is
focused
in
business
and
healthcare
No
specific
preference
but
interested
in
companies with
11
Factors
evaluating
potential
investments
in
cleaning
technology, IT and
software
industries.
However,
any
other industry that
is beyond the reach
of contemporary
financial
institutions are also
the one where
Finnvera
holds
strong interest in
investing.
Generally,
these
loan amounts vary
with upper limit set
to 100000 Euros.
services
industries
however
in
recent days they
are
also
interested
in
business process
outsourcing,
information
services, media
and
communication
industries.
It
invests in post
venture and prebuyout
phases
only.
multiple revenue
Sierra
Angels
preference
are
those investment
potentials that are
from
the
software,
internet, wireless
IT, social media,
health
technology, clean
technology,
technology
innovation
and
alternative
investments. Its
funding
scopes
are geographically
limited
to
companies
in
Nevada, California
and surrounding
locations. Sierra
Angels consider
potential
investments
technical
superiority,
sustainable
competitive
advantage,
IPR,
strategic
partnership,
market potential
and
realistic
scalability options,
management
expertise, skills,
coach-ability, exit
strategy,
customer
Finnveras
evaluation
for
potential
investment
involves ensuring
the limited liability
status
of
the
company
where
the applicant must
be having atleast
20 percent of all
voting
and
shareholder rights.
At the same time,
it must also comply
with the basic
general guideline
of
preferences
detailed by the
EUs SME initiative.
Applicants do not
need any collateral
to
deposit
as
Finnveras
financing decisions
are solely based on
the prospect of the
business.
Petra
Capital
Partners
investment
evaluations are
based on growth
explosiveness,
presence of noncontrol investor,
presence of no
shareholder
liquidity, absence
of
negative
cashflows,
positive EBITDA
and
buyout
prospect
and
ownership
control.
5 to 10X return
Manageme
nt team
Valuations
and terms
Exit
prospects
streams.
potentials
12
Firm
valuation
methodologies
Requirements on
proposal
According
to
CircleUp,
it
concentrates
on
companies
with
brand potentiality for
its products that are
tangible and are
available through a
retail
distribution
system. An interested
entrepreneur
applicant
seeking
capital funding needs
to list his company to
CircleUp through its
initial
assessment
system. Once the
initial
assessment
results to be a good
acquisition cost,
channel
development
strategy, financial
project, margins
in sales, use of
proceeds, returns
and valuation.
Sierra Angels firm
valuation
methodology
looks
for
consistency
in
companys overall
status like its risk
to reward ratio,
use of proceeds,
return potentially
in the matrix of 5
to 10 times over 3
to 5 years time
span.
Finnveras
perspective
of
financing is slightly
different
that
others
as
it
believes
entrepreneurs
seeking
funding
must be having a
complete financing
plan
for
the
business. As such
applicants funding
request
from
Finnvera is just
only one part of
the entire financing
plan
and
that
financing plan can
should
include
complete targets,
strategies, plans,
market situation
assessment
and
should
clearly
visualize how the
financial plan is
going
to
get
returned
with
profitability
and
sustainability.
Finnvera
has
downloadable
application
form
on its website
which needs to be
filled up with all
required
details
and submitted to
the site. Upon
review
of
the
application
form
Finnvera it will
make contact with
the applicant to
describe the future
procedures.
Petras
firm
valuation
depends
on
number
of
criteria
like
proven
management
team,
revenue
above 10 million
US$,
positive
EBITDA, growth
rate more than
20%, high gross
margin,
restrictive capital
expenditure
in
recurring nature
and
highly
recurring
revenue.
Return prospect,
There is no such
details
about
entrepreneurs
proposals length,
structure
and
details
requirement
however
interested parties
need to contact
Petra
Capital
Partners to make
their cases.
Need to submit
competitive
advantages
sustainability
and
multiple
revenue stream.
initial pitch on
the
website,
once
okayed,
followed up with
other
procedures.
13
Types
financing
of
Finnvera
offers
multilateral
financing
arrangements like
seed
loan,
internationalization
load, entrepreneur
loan,
Finnvera
loan,
financial
Petra
Capital
Partners finances
in two ways - the
growth financing
and
value
maximization in
exit.
Under
growth financing
it
withdraws
All
stages
funding.
14
% of applicant
financed
work as your
financer lead to
arrange
more
funds from other
angel
investors
network
and
beyond.
Sierra
Angels termed its
financing
as
ecosystem
approach
to
support the start
up
entrepreneurship.
bridging
loan,
grants and bond
financing.
Also
there is a 3.25%
interest fee and six
months
grade
period
and
repayment can be
extended upto 10
years. Applicants
own share in the
stock is assumed as
a security and the
whole process has
a nominal fee.
Finnvera stands as
one of the most
popular financier in
the EU only due to
its flexible terms
and
supportive
nature.
It
has
strong number of
applicant who are
already financed
with billions of
Euros while few
billion Euros are
still left with the
organization
to
finance.
At
estimate 25% of all
applicants
are
successful
in
getting
funding
however
those
who require less
than 35000 Euros
are even more
highly successful in
securing Finnvera
financing.
There is no such
data on how
many percentage
of applicants get
financed through
Petra
Capital
Partners. Prior to
its fourth round
of funding, the
company
invested over 540
million US$ in 94
companies.
No such data is
available.
15
Conclusion
In this report we have discussed different capital funding methods with their instances to different
questions. The intention was to familiarize the growing forms of capital funding and it included Peer to
Peer Lending, Incubator, Public Private Partnership, Crowdfunding and Angel Investors. Each has its own
way of working and purpose, while all of them are desperately looking to find that unique business
where they can invest the money. It is their form of business if they cannot invest in time, they will not
run profitably in the future. They will not be able to grow. And if an entrepreneur can present a
sustainable, unique and competitive leverage based business plan; these capital financers will jump in to
join the entrepreneur with their money. The fact is, there is money if one has a plan.
16
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