Alternative to Debt: Equity Financing Pros

March 20, 2009sparxoo_admin

By David Capece, Managing Partner

If you are smooth-sailing company, with the wind behind your cashflows, you have control over where you’re going. But, if you don’t have the wind on your side, you’re going to need the help of someone else.

Debt can be a reliable source of financing if your business is headed in the right direction (steady cashflows and no waver in sight) and you can easily pay-off any accrued debt. But if you’re in a less predictable business with higher growth curves, you might want to consider the alternative, equity financing:

Here are some questions you should ask yourself before you decide to pursue equity financing:

Are you a rising star or a cash cow?

Though you might want to keep going in the same direction as you always have, if you want to make a leap, you might need expansion capital.  Can you bring your business to the next level by making some minor adjustments? Be realistic. If you’re not a cash cow, it might take a significant cash infusion.

What stage in the business cycle are you?

1. Early Stage
If you’re just gaining market traction with your business and you have a plan to take the next step, then you can pursue angel investors. They invest in early leaders and could be the financial backing to help you attain a higher calling.

2. Established Stage
You’ve been in business for quite a while, but you don’t have the cash flows to leap ahead of the big boys. If your business still shows promise and has success potential, try a venture capital firm. They invest in early and later-stage companies. They have the deep pockets your business needs to take on established leaders.

Are you willing to lose complete control?

Before going to an angel investor or venture capital firm, consider how much you value control in your enterprise. Are you the entrepreneur that will not allow any part of your pie eaten or can you see the power of giving away a slice of a bigger pie? Determine how much company control you are willing to give up. Be careful not to sell yourself out trying to advance your business.

If you decide you control your company and no one else can share the helm, you might find yourself without a paddle: stuck in the middle of nowhere with not a grain of sand in sight. This strategy might be a bit short-sighted. Equity financing can be a very beneficial strategy to help your business achieve more. By involving venture capitalists and angel investors into your endeavor, though you are giving up some control, you are sharing the risk–thus sharing the passion to succeed.  With deeper pockets, you can grow into a more formidable market player.