There are two major ways the entrepreneur can obtain outside financing for a new venture.
Debt Financing: This involves going into debt by borrowing money from another person, a Bank, or a Financial Institution. This loan must be paid back over time with interest. A loan also requires collateral that pledges business assets or personal assets, such as a house, to secure the loan in case of default.
Equity Financing: Involves giving ownership shares in business to outsiders in return for outside investment monies. This money does not need to be paid back. It is an investment, and the investor assumes the risk of potential gains and losses. In return for taking that risk, the equity investor gains some proportionate ownership control.
Equity financing is usually obtained from venture capitalists, companies that pool capital and make investments in new ventures in return for an equity stake in the business. Typically, venture capitalists finance only a very small proportion of new ventures. They tend to focus on relatively large investments, such as N160,000,000 (about $1million) or more, and they usually take a management role in order to grow the business and add value as soon as possible. Sometimes that value is returned when a fast-growing firm gains a solid market base and becomes a candidate of an initial public offering (lPO). This is when shares of stock in the business are first sold to the public and then begin trading on a major stock exchange. When an IPO is successful and the share prices are bid up by the market, the original investments of the venture capitalist and entrepreneur rise in value. The anticipation of such return on investment is a large part of the venture capitalists motivation; indeed, it is the nature of the venture capital business.
When venture capital isn’t available to the entrepreneur, another important financing option is the angel investor. This is a wealthy individual who is willing to make an investment in return for equity in a new venture. Angel investors are especially common and helpful in the very early start-up stage. Their presence can help raise investor confidence and attract additional venture funding that would otherwise not be available. For example, when Ajike wanted to start her sales of compensation firm, Azrab Ventures, she contacted to 40 venture capital firms. She was interviewed by 20 and turned down by all of them. After she located N50,000,000 from two angel investors, the venture capital firms got interested again. She was able to obtain her firs N320,000,000 in financing and has since built the firm into 200-plus employee business.