Raising capital for early-stage businesses (Part 1 of 9): What are the options?

The legalization of investment crowdfunding has rightly garnered substantial media and industry attention.  Still, the optimal path for an early-stage/small company to meet its capital needs is not obvious.

Venture capital is only realistic and suitable for a very small percentage of companies:  highly-scalable, early-stage businesses with “hockey-stick” shaped revenue projections and marquee management teams.

For the other ~99% of young or small companies, raising money formally from private capital markets is accomplished by:

1. Obtaining a bank loan

2. Issuing private equity or debt securities to investors

a. By pitching privately to major, select investors

b. (New!) By advertising publicly to potential investors

i. Via one’s own website, to accredited individuals

ii. Via a third-party funding portal

(1) To accredited individuals

(2) To the general public

(Note:  This sets aside informal means of fundraising, such as personal credit cards, friends & family, and home equity lines of credit.)

Options for raising private equity or debt capital

 

Traditional loan

Traditional 506(b) private placement General solicitation via proprietary website

General solicitation

via third-party funding portal

506(c):accredited investors

Title III:

any investors

Description Obtain a loan, or raise revolving fund to draw from. Solicit a few, large investors who have specific interest in the industry / deal structure in question. Build proprietary crowdfunding site for 506(c) offering of company’s own securities to accreds. List company’s securities on a third-party funding portal
Investors Bank Accredited individuals with pre-existing relationship (angels) Any accredited individuals Any accredited individuals Anyone
Process Approach traditional lenders Pitch to individuals and angel groups; can retain local private placement firm (+ broker-dealer) Buy white-labelled front end + outsourced back end (+ broker-dealer) Apply to best-fit portals (who have broker-dealer arms); simultaneously also do offline fundraising activities
p(success) Moderate High Moderate Moderate Low
Time to execute Fast Moderate Slow Moderate Slow
Hassle Low Moderate High Moderate High
Cost Moderate High High Moderate Moderate
Congruence with issuing company’s biz plan / objectives ? ? ? ? ?

For each particular company/issuer, assessments regarding probability of success, execution time, hassle, cost, and strategic fit will differ across the alternatives.

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