Financial Health: Three Finance Terms You Should Know
In our second installment of Financial Health (Click here to read the first), we're discussing a few terms that are tossed around the world of entrepreneurs - specifically among start-ups: venture capital, angel investors and equity. A study conducted by the Small Business Administration(SBA) found that women-led businesses (WLBs) are one of the fastest growing groups of entrepreneurial firms, yet few of these firms receive private equity funding. In order to change this pattern, we want to make sure you're familiar with these terms and have the resources you need to seek funding from VCs.
Equity Capital: Money raised by a business in exchange for a share of ownership in the company. According to the SBA,the primary objective of equity investors is to achieve a superior rate of return through the eventual and timely disposal of investments.Ownership is represented by owning shares of stock outright or having the right to convert other financial instruments into stock of that private company. Two key sources of equity capital for new and emerging businesses are angel investors and venture capital firms. (More on these terms below)
Venture Capital (VC): Venture capital is financial capital provided to early-stage, high potential growth start-up companies (think Instacart, Uber and Airbnb). The venture capital fund earns money by owning equity in the company it invests in. Since start-ups can't usually seek capital from traditional resources like banks, venture capitalists take on higher risks in exchange for higher returns.
Here's a few majority women operated (or focused) venture capital firms you should know about:
Angel Investors: Angel investors are high net worth individual investors who seek high returns through private investments in start-up companies.Currently, women make up 23% of all entrepreneurs seeking angel capital in 2013 (up from 9% in 2005) so it's important that women are represented among investors.
If you're interested in obtaining funding from an angel investor, check out the following resources:
- The Double Digit Academy was created by CEO and experienced fundraiser Julia Pimsleur as a response to the statistic that only 4% of Venture Capital in the U.S. is invested in women-run businesses.
- Golden Seeds is a discerning group of investors, seeking and funding high-potential, women-led businesses.
Recap: If you're creating a tech start-up, odds are you'll need to obtain some equity capital. There are generally two ways to go about doing this. Since traditional resources like bank loans or borrowing from family members won't provide enough money for your fast-growing start-up, you'll have to reach out to angel investors or venture capital firms (or both!)
For more information on venture capital, angel investors, and equity, click here (Small Business Association).