The past two weeks, we’ve been talking about getting funding for your business. Thus far, we’ve covered yourself, friends and family, and Angel investors. Today we’re going to branch out into the last two levels of funding: Venture Capitalist and IPO. This is where you really start to get serious about growth in your business.
4. Venture Capitalist. Now the Venture Capitalist is very sophisticated. These are investors who will take your business to another level. They want a majority equity stake. Venture Capital, or VC’s, can be pretty rough. When the VC Fund comes in, they will want to run the company and take several board seats—but they will run a tight ship. VC is the second round of funding. This level is $1 million-$2 million.
5. IPO: Initial Public Offering. Investment bankers handle the IPO. They are the ones selling your company’s stock. With the IPO, we’re talking public shares with public investors, because at this stage, anyone can invest in your company. That is because the IPO level is where you take your company public. Now, you don’t have to go public. Some people will exit at the Venture Capitalist or even the Angel level. That’s rare. There are some big, private equity firms that you can sell out to—but the IPO and sellout option are far away for most small businesses.
Outside of the five levels, here are two things you will need to know about:
Limited Partnerships: Compared to the simple investment LLC, the Limited Partnership (LP) can be quite sophisticated. In this process, we sell units and can include accredited and non-accredited investors. In the LP, one partner is limited while the other is general. There’s more of a hierarchy element, while in a Limited Liability Partnership (LLP), the partners tend to be on more even ground.
One of the best ways to raise money for investing in real estate is through an LLC or LLP that’s selling participations. I like LLC’s for simple real estate investments, because you can put a deal together and raise a couple million bucks. You don’t even have to go to a PPM. You just give a simple term sheet with the operating agreement of the LLC and can take capital. Most states, including California, will allow LLC’s to function like that at a limited measurement.
PPM: Private Placement Memorandum. People often do a PPM at the Angel level. This is basically your business plan with a very robust financial pro forma full of disclosures, exemptions, and lawyer language. They typically run about 60-70 pages in length. Accredited investors take these, read them and make their list of questions. If they choose to invest, then you issue them a subscription agreement and that is their proof of what they own in your company.
If you’re going to raise big money, more than likely you’re going to have to do a PPM. Now, if you’re running a normal private equity fund that operates under hedge fund rules called 506 Regulation D in the SEC code, then that level of fund is limited to 100 investors. If you’re qualified by the fund, 35 can be non-accredited. When it comes to Angels, their investments are running $50k-$100k. If you’re doing a private equity fund fund it’s 100.
But if you’re doing a company, you can get up to 500—and the SEC in the JOBS Act just upped that number to 2,000. They’re now allowing more investors so that you can do up to 2,000. Investment funds, or hedge funds, can typically go to 100 investors. But if it’s a company we’re investing in, we can do 500-2,000 investors. On top of that, if a group forms an investment fund, that fund is considered 1 investor. A group cannot specifically invest as 1 investor, they actually have to make an investment fund. So just say some accredited investors come together and put $2 million in a fund—they can do that and it counts as one investor.
I hope you enjoyed this series on raising capital for your business. Good luck out there!
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