13-1: Define equity financing for entrepreneurs and outline its main stages.
Equity financing is the sale of ownership stake within the company in exchange for funding. Seed-stage financing, startup financing and early-stage financing describe funds in support of different early-business objectives. As the organization grows, it may then seek out second- or later-stage financing through subsequent rounds of financing. Businesses may also choose to undergo an IPO, opening the firm to general market funding and offering an exit to early investors.
13-2: Illustrate the basics of enterprise valuation.
Investors use a variety of factors to come to valuation proposals, including market conditions, opportunities, competition, comparables and how much value a given venture can add to the mix.
13-3: Describe angel investors and how they finance entrepreneurs.
Angel investors are typically high-net-worth individuals who are accredited investors investing their own money in startup ventures. Other types of angels include corporate angels, professional angels, enthusiast angels, and micromanagement angels, each characterized by distinct goals and value-added capabilities.
13-4: Explain the role of venture capitalists (VCs) and how they finance entrepreneurs.
Venture capitalists differ from angels in the sense that they are professional money managers. Entrepreneurs should also exhibit at least as much caution as venture capitalists when seeking VC funding; the owners are likely to concede a significant ownership stake in the venture, and need to be certain of both why venture capital is absolutely necessary and which firm would provide the best guidance.
13-5: Describe how investors carry out due diligence processes.
To ascertain the prospects of any potential investment, angel investors and venture capitalists alike conduct due diligence processes of the firm under consideration. Essential to this process is identifying a method and timing for the investors to recoup their capital at exit, such as completing an IPO.
13-6: Explain the money versus power tradeoff and the funding life cycle.
The typical “entrepreneur’s dilemma” is choosing between retaining significant ownership and control versus securing substantial funding and losing majority ownership. The venture typically starts with finding partners and securing initial funding, followed by formal founding and registration of the business. As the business grows and additional financing is needed, angel and venture capital investments are sought out. Finally, the most successful of startups often accomplish an IPO.