How to raise capital when an IPO isn’t an option
Let’s run through all the major options
While IPOs are one of the best-known ways of raising capital, they aren’t realistically open to everybody. The cost and complexity of public fundraising precludes it to many growing businesses. However, this doesn’t mean those firms don’t need access to capital; far from it.
So how do ambitious companies obtain the resources to grow when an IPO isn’t an option? There are a number of alternative fundraising routes out there – the challenge is to choose which option is right for your business.
Let’s take a look at some of the IPO alternatives through which businesses can raise capital, and the pros and cons of each method…
What is it? A private firm that invests in growing companies before selling their stake further down the line. They tend to purchase established businesses that need some sort of turnaround or support to expand, usually purchasing 100% ownership of that company.
What are the pros? Private equity houses offer all the funds that businesses need. They are a stable finance option, as they tend to invest for 3-5 years. Many also offer mentoring support beyond capital investment, and as the stakes are high, they have an extremely vested interest in ensuring your organisation succeeds.
What are the cons? Private equity companies want high return on investment, which means business owners often have to give away the majority stake in your company. As well as diminishing the returns if and when the business is sold further down the line, you also lose control over day-to-day decision making.
What is it? A firm or group of investors looking to back emerging businesses. It is similar in concept to private equity, but VCs tend to focus on start-ups and only buy up to 50% of the equity available in order to spread risk across their portfolio.
What are the pros? Unlike bank loans or peer lending schemes, there is no obligation to pay back the money you fundraise. And like private equity investment, companies benefit from an injection of business expertise that can enable growth, alongside the capital itself.
What are the cons? VCs require you to give away a stake in your company and share control over managerial decisions – but often the stake is not as large as private equity companies demand. The actual process of securing investment can also be time-consuming and longwinded, and because venture capital companies spread their risk across multiple firms, you may find it difficult to get the same intensive level of support that private equity offers.
Crowdfunding and peer-to-peer lending
What is it? Financial backing from members of the public – either by giving money or lending it – through a third-party website. For crowdfunding in particular, companies tend to offer exclusive perks and benefits to incentive investment.
What are the pros? Likely to attract investors who then become customers, as they have a natural interest in your brand. Eliminates traditional financial institutions that make fundraising costly and complex. Low entry level often attracts new type of investors that are not interested or appropriate for traditional investment models. A good PR exercise as well.
What are the cons? Crowdfunding and peer-to-peer lending tends to be run through a third-party platform, which means you are entrusting the security of your project to someone else, and you will need to pay them a fee for any investment you achieve. Some will not let you release funds until your total goal has been reached.
There are often geographical limits to which countries you can access through crowdfunding platforms, and there’s a public reputation risk if the deal goes wrong or you fail to deliver on your promises.
Digital asset investment
What is it? Online platform for creating and launching offers, which people can invest in by purchasing digital assets. It can be either a public offer or private, with both offering instant liquidity. Greater regulation/legal backing than some other emerging investment methods like ICOs. Some solutions are also a portal for managing investor relationships, communicating and engaging in activities such as corporate actions and voting resolutions.
What are the pros? Quicker, cheaper and more controlled than traditional methods as it cuts out unnecessary middlemen; a new offer can be devised and launched in just 10 weeks. Digitising assets mean you can offer fractional shares, attracting new audiences. Solutions built on the blockchain are extremely secure and offer immediate liquidity. Also supports beyond fundraising as a lifetime solution, which can nurture existing investor relationships to grow their value.
What are the cons? Make sure you choose the right platform, as some solutions support primary issuance but do not provide resources to manage the complete investment lifecycle.
Taking back control of the capital raising process
As creators of a digital investment platform, the WeOwn team will naturally sway towards preferring the last option, but we encourage companies to think carefully about which choice is best for developing your business.
We are seeing first-hand the benefits gained by companies using our innovative Digital Marketplace to create digital assets and launch investor offerings – whether public or private.
Instead of jumping through expensive hoops to launch on a stock exchange and compete for airtime against much bigger companies, SMEs are able to complete initial funding rounds in just 10 weeks, controlling the process throughout. Fractional share opportunities also open up new investor audiences, particularly Millennials, who see the value in straightforward digital transactions.
More importantly, our platform gives growing companies tools to support the end-to-end investment journey, communicating and transacting with shareholders through our online dashboard. This enables them to enhance the value of existing investor relationships by understanding and communicating with their investor base online, and channeling core activities such as voting and corporate actions through a single digital dashboard.
Sign up to our Digital Marketplace for free to see how easily your business can raise the capital you need to grow.