I was doing some research on funding options for entrepreneurs in Singapore and decided to blog down some of my newly-acquired knowledge. We have often heard about angel investors, venture capitalists, seed funding and incubators. Many question and wonder the roles, involvement and motives of these various categories of investors with regards to the development of enterprises. Hope this article can bring some form of clarity.
Basically there are two ways an entrepreneur can obtain funding: either through debt financing or equity financing. Debt financing is usually secured against certain assets and the creditor has the power or rights to demand repayment of any money owed, should the company be forced to close down. On the other hand, an equity capital involves the exchange of shares in the company for funds. The equity investors bear the risk of losing their investment should the company failed or benefit through participation in profits. Below are some common form of equity financing:
Angel investors are private investors who are wealthy individuals looking to park their excess wealth into new ventures. They usually provide capital for commercial start-ups, in exchange for equity or convertible debt and they typically invest between $25,000 to $500,000. Angel investors are usually very experienced investors with a lot of contacts and business experience and majority of them look to benefit from tax relief, which varies in different countries.
Venture capitalists (VCs) are usually corporate firms looking to invest in start-ups, in exchange for equity in the company. VCs invest from $500,000 upwards and usually demand greater control of the company, as compared to angel investors. This is because VCs invest with the end-point in mind and they expect quicker and higher return on investment; henceforth, they are often more demanding and aggressive in order to grow or expand the business.
Seed funds usually support cash required for pre-start research or prototype development. Seed funds are usually for technology invention and innovation companies, for example, companies developing mobile apps and social networks. Risks involved are usually higher but the returns can also be potentially great.
Incubator funding are usually focused on early stage companies which have a few or no revenues yet but looking at equity financing for marketing and operation needs. Business incubation usually provides a nurture and supportive environment for entrepreneurs during the early stage so that the commercial entity can succeed. The objective of incubation funding is to shorten the lead-time and reduce the cost of establishing the business.
Of course, the ultimate vision of most entrepreneurs is to have their companies listed on the stock market. The potential rewards, in exchange for shareholding in the companies, can be millions. In Singapore, the local stock market operator and regulator is SGX. To qualify for listing in the local bourse, applicants need to meet a stringent set of requirements.