Top 5 Equity Funding Options for Entrepreneurs

May 22, 2013

in Investing

By Sgwealthbuilder (guest contributor)

I was doing some research on funding options for entrepreneurs in Singapore and decided to blog about some of my newly-acquired knowledge. We have often heard about angel investors, venture capitalists, seed funding and incubators. Many question and wonder about the roles, involvement and motives of these various categories of investors with regards to the development of enterprises. I hope this article will clarify this.

Basically there are two ways an entrepreneur can obtain funding: either through debt financing or equity financing. Debt financing is usually secured against certain assets and the creditor has the power or rights to demand repayment of any money owed, should the company be forced to close down.

On the other hand, equity financing involves the exchange of shares in the company for funds. The equity investors bear the risk of losing their investment should the company fail, but benefit through participation in profits. Below are some common forms of equity financing:

1. Angel investors

Angel investors are private investors who are wealthy individuals looking to park their excess wealth into new ventures. They usually provide capital for commercial start-ups, in exchange for equity or convertible debt, and they typically invest between $25,000 to $500,000. Angel investors are usually very experienced investors with a lot of contacts and business experience and the majority of them look to benefit from tax relief.

2. Venture Capitalists

Venture capitalists (VCs) are usually corporate firms looking to invest in start-ups, in exchange for equity in the company. VCs invest from $500,000 upwards and usually demand greater control of the company, as compared to angel investors. This is because VCs invest with an exit in mind and they expect quicker and higher return on investment. Hence, they are often more demanding and aggressive in growing or expanding the business.

3. Seed funding

Seed funds usually support cash required for pre-startup research or prototype development. Seed funds are usually for technology companies, for example, companies developing mobile apps and social networks. Risks involved are usually higher but the returns can also be great.

4. Incubator funds

Incubator funds are usually focused on early stage companies which have little or no revenues yet but are looking at equity financing. Business incubators usually provide a supportive environment for entrepreneurs during the early stages so that the commercial entity can succeed. The objective of incubation funding is to shorten the lead-time and reduce the cost of establishing the business.

5. Stock Market

Of course, the ultimate goal of most entrepreneurs is to have their companies listed on the stock market. The potential rewards, in exchange for shareholding in the companies, can be in the millions. In Singapore, the stock market regulator is the SGX. To qualify for listing in the local bourse, applicants need to meet a stringent set of requirements.

I hope this article on the different ways of raising funds for your business has been helpful!

 

By guest contributor SG Web Reviews, a Singapore blog on business ideas.

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