Over 2 million new businesses open their doors in the United States each year and many use private equity to help finance their start up costs. Two major types of private equity used for financing new business start up costs are angel investors and venture capital firms. Venture capital firms invest in between 500 and 800 businesses of the 2 million that open each year. According to the National Venture Capital Association, 11% of the job openings come from businesses who have private equity investing from venture capital firms.
What are the benefits of private equity for small businesses? Probably the first and foremost is employment. Jobs are created when new companies open. This creates a domino effect as people spend money on food, vehicles, housing and other consumer goods. Businesses that are not able to obtain public funding depend on private equity for start up costs, to pay their employees and offer new product to the public.
Venture capital firms own a small piece of the business with their investment. They do have some control over what happens in the company they invest in. They are involved in the expansion of a business, of the development of new products and in the restructuring of the business.
Angel investors often charge a high rate of return on the capital invested in a company. They mainly focus on helping with business start-up costs. They are a private investor and often work together with other private investors. You often see them work in networks. Their capital may come from a trust fund or some other type of investment fund.
Private equity for small companies is used to support the company for the long term. They provide working capital to help small companies succeed. Each private equity firm has its own set of goals and methods of investing. Often the company they invest in is not traded on a stock exchange, either because they are just starting up or because they are not making money or both. They depend on private equity funding to help them grow.
Small companies who obtain private equity capital are often considered to be high risk. This is why investors such as venture capital firms and private angel investors earn a high rate of interest on their investment. Although the business is considered to be high risk, private equity loans are badly needed to help the company succeed.
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Venture Capital and Private Investment for Small Businesses / Entrepreneurs