Mezzanine Funding

Mezzanine funding – Short term lending for the long term benefit.

Mezzanine funding, in a generic sense, is a venture capital term used to describe funding for a company that is somewhere between being a startup and IPO, or Independent Public Offering. It can come in the form of stand-alone subordinate debt (the most common) or equity transactions. Sometimes it will start off a as a standard debt loan with interest, and if the initial loan is not paid back on time or in full the lender will take an equity ownership role.

Since there is a lot of risk involved for the lender, or investor the interest rate is much higher than a regular loan. The main purpose of this financing is to give a business the opportunity to get the capital they need much quicker while they wait to get a bank loan, or while they get their financing in order to improve chances of getting approved for a loan.

This additional financial leverage can facilitate:

• Mergers and acquisitions financing
• An emerging growth opportunity
• A management or other leveraged buyout
• Corporate debt refinancing
• Recapitalization
• Corporate restructuring

As subordinate debt, the rate and terms of mezzanine funding follows suit with the position it holds along the company’s evolution. As late-stage venture capital, its position, in many cases, is amidst the final round of financing prior to an IPO. Committed at this level, it usually has less risk as well as less potential appreciation than at the startup level. However, there is more risk with greater potential appreciation than in an IPO.

Seed Funding

Seed funding helps companies with a new product launch.

Seed funding is most often confused with startup capital, but they are two different things. It is provided to help a business develop an idea, create the first product, and market the product for the first time. Companies that typically qualify for seed funding are around a year old, and they have never created a product or service for commercial sale. The company is generally so young that the key management team has not yet been assembled, or if it is in tact it was recently formed.

Seed funding is most commonly provided by angel or other private investors. If your business uses an investor to gain capital there are some things to keep in mind. As the owner you will have to share your control of the business with the investors and you will also be required to share confidential business information with potential investors. Investors are also seeking to earn at least 30% on their money, so make sure your business can provide at least that much of a return before going after investors heavily.

Make sure that you also have a clear exit plan for the investment in place after a few years. In order to qualify for this sort of financing through an investor it is important that the market for your product be at least $1 billion total. These are just a few things to keep in mind when looking for an investor for your business.

Second Round Funding

Second round funding is allowing you to continually grow your business.

Second round funding is working capital for expansions of an already established business that is producing and shipping goods and services. It is for companies that are constantly increasing their accounts receivables and growing their inventory. These funds will more often than not come from a private or angel investor or a venture capitalist.

Often times second round funding from the investor will be enough to help bolster the balance sheet enough to give a business more leverage as they pursue a loan from a bank. They could then use the financing from the loan to increase business and really grow the business even further. Sometimes banks may not want to invest in some businesses, even in the second round because they may have a risky business model. A risky business model won’t turn away many investors seeking a potentially high return on their investments.

Many businesses wonder if they are at the point where they need second round funding. If your business completed a successful launch more funds are typically needed to develop the marketing plan, hire additional staff, and establish a strategic position within the marketplace. Establishing a market position is typically known as the series B round of funding. The first round of funding is called series A. This helps investors know where they stand in regards to earlier investors. Keep a close eye on the growth of your business so you go after the funding at the right point.

First Round Funding

First round funding or "venture capital" typically follows seed and early stage capital that was used to build the business’ full-time management team, develop the business’ first saleable product, and demonstrate that the business is very likely to be profitable.

Before approaching funding sources the following should be completed:

◦Financial Analysis: Identifying all sources of revenue, assessing likely business costs, determining capital needs and modeling financial projections.

◦Market Research: Consisting of primary and secondary research to determine market size, market growth potential and other relevant factors.

◦Competitive Analysis: Identify relevant competitors and assess their strengths and weaknesses as an aid in determining underserved market needs and potential market demand for a new business’ products and/or services.

◦Business Plan Development: Developing thorough, actionable plans for implementing your mission statement and, subsequently, turning a profit.

First round funding sources are primarily hands-off investors who will open their rolodexes to aid you with their contact base and open their wallets to invest in your ready-for-market business.

Equity Loan

Equity loan

Is typically an "investment" in a company that is secured by a certain amount of that company’s shares and structured, in part or whole, as a loan. Investment banks will provide funds secured by the "equity" or ownership shares of your company.

Companies that receive funding are those in large rapidly growing markets, or in niche markets which are not targeted by major players.

Investment Stage

Early and later stage companies with a founder and partial management team with revenue or profits and the need for expansion capital.

Size of the Investment

Typically $1-2 million initially with up to $5-10 million over the life of the investment.

Duration

Investments typically are for 3-5 years, but sometimes may last longer.

Management Buy Out

Management buy out: Existing company managers acquire a large part of ownership.

Management buy out solutions involve working to structure the buyout of the corporation, subsidiary, division, or product line from start to finish. During this process if a company is already public than it would become a private company once the management took over ownership. Most of the time though during this phase a company is privately held.

The concerns that go along with a management buy out is that the management will possess more knowledge than the previous owners due to their current positions. Another negative of a pending management buy out is the downward spiral of the company stock prices. Once current investors get word of this they will start selling their shares.

Many people are against a management buy out because they think it could be considered insider training because of the knowledge of the management of the business situation.

Management will choose to pursue a management buy out since they want to save their current jobs. They can tell that the company may be going under, so they want to work hard to resurrect the company and make some big changes. Also the management may have received word that an outside management team is coming in to take over their posts. It is enough to bring them to take action.

Even if all of the managers pooled all of their money together, it typically would not be enough capital to really save the business. So it is good to pursue some debt financing options found in our free business capital search engine.

Financing Your Venture: Angel Investment - Angel Investors and Venture Capitalists

Merger and Acquisition Funding

Merger and acquisition funding at a competitive rate requires a properly structured transaction. Financing for such scenarios comes in a variety of alternatives.

These financing alternatives include:

◦New private equity placement
◦Sale leaseback vehicles
◦Bridge or term loans
◦Other mezzanine-type products
◦Revolving lines of credit

The advantages of growing through acquisition are many:

◦Key personnel acquired
◦Increased purchasing power
◦Greater geographic reach
◦Expanded product lines
◦Heighten industry recognition
◦Increased customer base
◦Reduction in overhead

Equity Investments for Large Markets

An equity investment is defined as the purchasing of one or more shares in the ownerships of a business by an investor. These investors are then entitled to shares of the company’s assets in the case of liquidation. These shares of stock may be bought and sold among stockholders.

Equity investments are for companies with:

◦More than $25 million in gross revenue potential
◦Large National or International market potential
◦Management teams with successful track records


Capital Type Capital Type Definition

Equity Loan - Offer of an ownership position to induce the loan or can be a note that has an option to convert from debt to equity.

First Round Funding - Typically funding that accomodates growth. Company may have finished R&D. Funding is often in the form of a convertible bond.

Second Round Funding - Maturing company where a future leveraged buyout, merger or acquisition and/or initial public offering is a viable option.

Later Stage Funding - Mature company where funds are needed to support major expansion or new product development. Company is profitable or breaks even. Merger and Acquisition Funding - The combination of two companies. If one company survives, it is a merger. If both survive, it is an acquisition.

Mezzanine Funding - Company’s progress makes positioning for an Initial Public Offering viable. Venture funds are used to support the IPO.

Seed Funding - Earliest stage of business, typically no operating history. Investment is based on a business plan, the management group backgrounds along with the market and financial projections.

Difference Between Angel Investing and Venture Capital (VC)

How to Make Your Startup More Appealing to Venture Capitalists

Finding enough funding is often one of the hardest parts of starting your own company. Venture capitalists can be the solution to your small business financing needs, provided you entice the right ones to your enterprise. The Washington Post reported that venture capitalists contributed $26.5 billion to start-up firms in 2019. So how do you attract investors and secure a piece of that funding?

Highlight Your Business’ Unique Selling Points

Venture capitalists – individuals or groups willing to put their own money into new companies – are looking for business that is going to succeed. That means one that offers something unique to its market, one that is hard for other companies to copy and one that has a sustainable market of customers. Can you prove to investors that there are enough people really willing to buy your goods? Is your offering something so one-of-a-kind that it can be patented and protected from duplication? When you present your small business to VCs, make sure they leave feeling like your product or service is going to be “the next best thing.”

Network, Network, Network

In order to attract venture capitalists you really need to know some venture capitalists. Insiders say they invest very little into unknown people and companies. Most of their funds go to companies run by those who have networked into them. The point? Get out there and start making some connections. Try asking your attorney, your investment broker, your banker if they know any VCs who might be interested in your business. Go on social media and search out VC firms. Attend local fundraising events to hobnob with those who have cash to spare. Making some personal contacts is by far the best way to secure VC funding.

With some serious networking and a solid business model to present, you are sure to find financing from venture capitalists that will take your company to the next level.

5 Things Investors Want to Hear From You!

Pitching your company to angel investors or venture capitalists can be intimidating, especially when the fate of your start-up small business rests in their hands. In preparing your presentation, keep in mind that angels and VCs are essentially looking for five key ingredients in your business plan.

Market Size

Investors will want to know how large the market is for your particular product or service. You could have the best idea in the world, but if there is a very limited number of people who could possibly patronize your business then your product or service will never have the potential to make a lot of money. And the potential for great profits is the bottom line investors are watching.

Market Need

Once you have shown the angel investors or venture capitalists that there is a large enough market for your business, you need to prove that there is a real need for your service. Does your product or service truly offer something that the market needs, something that could significantly improve on or add to existing options?

Competition

Investors will want to know who your direct competitors will be and how many there are. Are there already companies that dominate the market in your specialty? If so, you need to show how you can outdo your competition to become the front runner.

Profitable Business Strategy

Your business needs to have all the right parts and pieces in place to make money. Investors want to hear about how you are going to keep your overhead costs down, how you already have the perfect manufacturer for your product, how you plan to offer faster servicer than what is available. They want to know how many employees you have or need to be efficient and quickly your business can start turning a real profit. How are you going to run your business so that it can become a smashing success?

The Right Person

Finally, investors are looking for the right person for the job. They want to see that you have the drive and passion to put your ideas into action. They want to know that you are driven and will work tirelessly to put their money to good use. You have to sell yourself as part of the investment.

If you can distill your business pitch into these five basic elements, you should be able to secure the funding you need to thrive.