Small businesses have the potential for enormous growth. However, they need adequate funding to achieve their goals. These small businesses have products that are ready to be launched into the market and need funds for branding and marketing. Other times, they need funds for research and development. They need funding to grow. One way for small businesses to get this is through equity investments. Startups might not have all the funds for capital, especially at that cradle stage. This is where equity investments come in.
Equity essentially means ownership. We can say equity investments involve putting down capital in exchange for a percentage of the company’s ownership and the rights to potential future profits. Businesses get their much-needed funding, and investors get a stake in the business based on the number of shares they bought. This is a standard method used by small companies to fund their capital and expenditures. Even companies like Amazon, Facebook, and Google utilized equity investments during their formative stages.
Robinhood, Carta, Stock Market Eye, and many other MRI tools have been employed by investors to do market research and choose the best start-up to invest in. Afterward, they contact the company and make an offer to invest.
With Fairmint, however, investors can now purchase shares in business right on the company’s website. Business owners can utilize this tool to raise funds for their business. It provides an engaging platform for interested customers, users, or partners who support your product and mission goals to obtain a stake in your business.
How does one invest in small businesses?
Generally, investing in small businesses carries a load of risk. Individuals funding most of these startups have conducted extensive research on their likelihood to succeed. Due to the risks involved, the rewards are incredibly significant. However, a downside for the small business is that these investors now have a stake in the company. As a result, they get a say in the business’s decisions. So, you could call it a win-win for everyone. What does this mean for an individual investor? An individual investor may decide to fund a business as a way of earning partial income. Awesome right?
Equity investments in small businesses involve either shares, venture capitalists, or angel investors. Let’s dive into each:
A small business listed on the stock exchange could get investors willing to place their money in the company by selling equity to them. The number of shares an investor can buy would depend highly on the business. The business will decide the number of shares to offer for sale to the public based on how much capital they are looking to raise. They also get to place a limit on how many shares an investor can have. All these in exchange for ownership in the business. However, it comes with a risk though; in the case of a company in its early years, it could be difficult for investors to get their money back when such a company fails. As such, an investor should ensure thorough research on where they put their money in. Or better yet, hire a fund manager.
Another method of equity investment in a small business is through venture capital. At their earliest stages, small companies sometimes cannot get the necessary funding through the stock market or by borrowing. They might not have the required collateral or price to engage in debt financing. This is where venture capitalists come in. Venture capitalists are usually wealthy individuals or institutional investors who invest large sums of money in startups for a significant ownership stake. They provide capital for businesses that have a huge potential in the nearest future. Thus, bridging the inaccessibility gap for small businesses. When the startup has reached the growth stage, it could be sold to large corporations. Some venture capitalists invest for this reason- to make a profit when the company is sold. Others invest because they really like to be part of something that has the potential to be huge.
Angel investing is another form of equity investment in small businesses. Angel investors, also known as seed investors, unlike venture capitalists, are high net-worth individuals who provide close or all of the funding required for a small business or startup. Most of these wealthy individuals are relatives of those who own the startups and are fully aware of the risk involved. They provide funds in exchange for a stake as high as 50% or higher. This automatically makes them a significant shareholder that makes decisions. Small businesses might not have access to capital markets; angel investors cover that gap. However, it is essential to note that it might be challenging to find an angel investor due to its risks.
Conclusion
As a business owner, you can utilize such tools to bring new stakeholders into the company and sell equity continuously right on their website. Companies would be able to add an “Invest” button on their website. This helps your company be more valuable by converting your equity into a powerful tool to raise capital for business.
Interesting Related Article: “Information on investing“