Raising Equity Capital

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Raising Equity Capital

When a private company decides to raise outside equity capital to fund there firm, they can turn several potential sources, these include Angel Investors, venture capital firms, institutional investors and corporate investors. Angel investors are individual investors who buy equity in small private firms (often friends of relatives) and are usually the first round of outside financing typically receiving a sizeable equity share. Venture Capital Firm (VCF) is a limited partnership that specialises in raising money to invest in the private equity of young firms. VCFs are attractive for new companies with limited operating history that are too small to raise capital in public markets. Within a VCF are venture capitalists (VC) who are partners that work for and run a VCF. VCs are expected to bring managerial and technical expertise as well as capital to their investments. VCFs offer limited partners a number of advantages over investing directly in start-ups themselves. However, for limited partners, these advantages come at a cost, with general partners charging substantial fees to run the firm. Private equity firms (PEF) are invest in equity of existing privately held firms rather then start up companies. PEFs initiate their investment by finding publicly traded firms and purchasing outstanding equity, forcing the company to become private in a transaction called a leverage buyout.

Another source of funding is Institutional Investors, which include pension funds, insurance companies and endowments are active investors in private companies. They can invest directly in private firms or indirectly by becoming limited partners in VCFs. Lastly, Corporate Investors are corporations that invest in private companies. Corporate investors sometimes might invest for corporate strategic objectives in addition to the desire for investment returns. Other sources include preferred stocks and convertible preferred stocks.

An initial public...
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