Equity Capital
RAA Ventures makes angel investments & provides venture capital to startups in internet marketing, web advertising, social media, mobile gaming and mobile apps. Learn more Here
Many businesses find equity capital to be useful. Equity capital is capital that is raised by company owners selling an ownership interest in the company, such as in the form of common stocks. Equity capital is not repaid to investors, but instead investors expect their ownership interest will rise in value. Equity capital is contrasted with debt capital, which is capital that is raised by incurring debt that must be repaid under certain terms, such as bonds. The value of equity capital is determined by estimating the current market value of the company’s assets, and once this figure has been determined, the total of all the company’s liabilities is subtracted. Equity capital is also known as equity financing or share capital.
Public equity capital is suitable for large, well-established companies that often boast hundreds of millions of dollars in revenue and profits. Millions of people invest in the stocks of these companies, affording the companies investment capital to expand operations, research, and technologies. The opportunities to secure public equity capital for the first time in an initial public offering are limited. Young yet fast-growing companies may be best suited to raising private equity capital. Private equity capital is often the only option for startup companies with high growth potential.
For example, if a startup company anticipates $2 million in product development expenditures during the initial two years, then turn a profit of $1 million during its third, $2 million in its fourth, and $5 million in its fifth year, the company may struggle to acquire a loan to get the business off the ground regardless of its great growth potential. However, if the company can demonstrate it has a solid business plan, a knowledgeable management team, an impressive pilot product, and a handful of clients or highly interested parties, a private equity investor may be willing to grant the company $2 million in development capital for a 25% stake in the company. Venture capital firms, leveraged buyout firms, and large corporations may also be sources of equity capital for startup companies. Alternatively, equity capital can be sourced from individual investors with the funds, expertise, and ability to mentor a starting company to help it develop and make profits, such as angel investors. Depending on where the equity capital is sourced from, the company receiving the funds may have to offer certain terms or meet certain conditions.
According to the Center for Venture Research, the angel investment market has recently been showing signs of stabilization following the financial crisis of 2008. In the first half of this year, the Center for Venture Research found that 26,300 entrepreneurial ventures received equity capital from investors, which is a 4.4% increase over the same period in 2010. Data indicates that angel investors remain committed to this investment class and at slightly higher valuations in comparison to 2010. Equity capital is especially beneficial for new companies that may not have the assets or capabilities of tapping into other forms of funding, like debt capital. However, these companies must demonstrate great growth potential to lure investors.
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