The Finance Department of firms provides correct and appropriate sources of equity capital for any new venture or start-up business to begin their operations. Any entrepreneur interested in new venture stocks up the equity capital provided by the finance department of strong firms or individuals and begins the operations. Equity capital is defined as capital cash that is free of debt provided by the business or investor to start the operation of any company. Equity capital investment done by the firms is in the form of issuing shares of the company to the firm who invested in it. Firms share in the profits earned by the business, so equity capital cannot be confused with the debt where one has to pay back the cash at fixed interest rate. Shareholders are entitled to the company’s preferred or common stocks. A firm or individual who has invested the majority of money in the business gets the authority to control the company. The funding done by the investor is returned to him as a share of capital earned from common or preferred stocks. Many countries have different primary sources of equity capital such as Business Angels, Venture capital firms, and Private Equity firms. The report highlights the sources of equity capital and detailed analysis of the sources of equity capital provided by investors or firms in Brazil.
Equity capital market is defined as market between business and financial firms working on to collect money for the company. To grasp the concept of equity capital or equity financing, one has to understand the equity dynamics that are considered while investing in the business. The dynamics of equity whether it is the owner of the business’ money or some investor’s money is involved circulate risk and reward. A firm interested in investing in the new venture of some company weighs reward and risk involved in the investment. The provisions of bankruptcy clearly state that when a business fails, the investor faces significant loss as compared to the owner. Hence, an investor is at higher risk, and naturally, they expect higher returns. The sources of equity capital which let the business to launch a new venture or push up already existing business are in the form of Business Angels, Venture capital firms, private firms, customers and suppliers, investment banking firms, former employers, large corporations, and government-backed small business investment corporations.
However, the major sources of equity capital such as business angels, venture private firms, and private equity firms are explained in the paper. Business angels to some extent are also termed as private investors. Business angels include entrepreneur’s personal friends or family who are ready to invest in the new ventures. Business angels willingly invest in the startup business or new venture proposed by the business in return for ownership equity. It has been seen over the short span of time increase in the number of business angels interested in investing online via equity crowdfunding. Another method deployed by the business angels is that business angels form groups and look out for companies interested in receiving equity capital and pool their investments in such companies. The wealthy individuals invest in the new start up business and also provide valuable management advice to the new startup businesses. South American country Brazil does have business angels in the equity capital market interested in investing in the new ventures by their choice. There are reasons why retired entrepreneurs or executives invest in the new ventures other than monetary advantages. Retired executives willing to keep themselves update about the developments in the particular business sector, to guide new entrepreneurs, and to make use of their experience and networks. The statistics of Centre Venture Research in 2007 reported around 258,000 active business angels available in the America. Initially, the idea of business angels is to pool their funds in a new start up business and provides the business with an opportunity to expand. Another major source of equity capital is Venture Capital, which is a type of private equity. Venture Capital private firms invest in the new emerging businesses and ventures that have the potential of growth. After analysis of the factors such as employees and annual revenue with the promise of high growth rate, venture private firms decide to invest.
Venture private firms are interested in business startups relying on innovative technology since such businesses have the potential to grow in the future. Venture private firms are seen to be interested in high-tech industries like information technology, media technology, and biotechnology. Business angels, private equity, and venture capital firms typically finance startup companies. Nevertheless, higher risk is involved when venture capitalists invest in a new start-up business and the expected return on such new arenas is less as well. Venture capitalists invest major chunk in new companies therefore they have a firm control over the decisions of the new company. The shares of preferred and common stock held by venture capitalists are higher and have greater authority over the decisions of the new company. Likewise business angels, venture capitalists contribute more than just financing, strategic advice, and they give other management tips to the new start up business. Earning equity capital through venture capital firms is entirely different from loan and debt. In the case of debt or loan, the lender gets the return on a fixed interest rate irrespective of business earning a profit or going in loss. Meanwhile, the return venture capitalist receives is dependent on the growth and profitability of the new emerging company. Venture capital firms undergo six stages while investing in a developing new company such as seed funding, start-up, growth, second round, expansion, and exit of a venture capitalist.
Another major source of equity capital that provides financial assist to the companies is private equity. Private equity firms invest private equity capital or cash in the companies with their set of goals, conditions, investment strategies and preferences. Businesses in need of expansion or help in the growth are backed by private equity industry, private equity firms’ pool in their funds. Some of the prominent strategies implemented by private equity firms include leveraged buyout, growth capital, mezzanine capital and venture capital. Therefore venture capital and business angels come under the broader term of private equity firms that is also termed as private capital. In leveraged buyout strategy, a private equity investor makes a transaction to the new emerging company, which is a combination of equity capital and borrowed money in such a collateral way that borrowed money is returned after earning sufficient cash flows. Nevertheless, the equity capital earned has a higher cost of capital than bank debt. Financial conditions such as the ability of the company to return the borrowed money are highly considered by private equity firms while investing. They expect a higher return since higher risk is involved if the business fails or collapses. The structure of private equity industry is classified into two broad categories General Partners (GP) and Limited Partners (LP). Limited partners have limited say or authority in making decisions for the company. On other hand, General partners are given the right to decide for the company and manage the private equity fund.
With the deteriorating economic growth and other controversial political affairs in Brazil, private equity firms managed to raise $5.6 billion of funds to invest in the firms. The number of deals and capital raised by the firms receiving equity capital from private equity industry has doubled over the past few years. Firms are raising funds of around $90 million in Brazil. The private equity firms are focused on raising equity capital despite challenges and threats posed by the market and macroeconomic factors. Brazil is a South American country with challenging different emerging markets; the market of Brazil has drastically changed over a certain period. The firms and companies in Brazil are highly involved in innovative projects, for which they need substantial funding from different sources of equity capital. The firms and startup companies consider the option of debt or equity capital, however, equity capital is preferred since the cost of capital earned from equity capital is higher than debt.
Brazil market heavily relies on the innovative technology industry and is opening up new ventures in the arena of Information Technology, media technology, and biotechnology. It is a known fact that Brazil equity market has undergone a drastic growth in market capitalization and transactional volumes. However, Brazilian market has a small number of listings. The business angels, venture capital firms, and private equity firms fund telecom industry, agriculture, media, and biotechnology firms with promising growth potential. There are quite a handful of investors who have invested in the Brazilian firms launching new techno ventures such as monasheez capital, kaszeck ventures, ideasnet, confrapar, warehouse investimentos and astellainvestimentos. These are the main venture capitalist who has invested in various emerging companies such as iFood, baby.com,pet supermarket and many other technology industries. Brazil has around 20000 business angels investors interested in more than four ventures at the time. Gavea angels, Floripa angels, and Sao Paulo angels are few of the prominent business angels and networks of Brazil. Sao Paulo Angels is a network of 30 business angels investing in the technological ventures and providing funds to the needy ventures. Sao Paulo is the largest city in Brazil and is considered as the financial heart of Latin America. Bahia, a northern city of Brazil, also has a network of business angels that is involved in promoting entrepreneurship, innovation, and technological ventures. A remarkable evolution has been observed in the equity capital market of Brazil.
The approach of Private Equity Firms is to pool in funds for needy ventures and promotes technology and contemporary ideas proposed by the entrepreneurs. Investors, NGOs, and other wealthy executives are coming forward to invest in the new emerging companies to promote innovation. There are also foreign investors who have invested in the firms of Brazil such as Accel Partners, Tiger Global, the social-capital partnership, NEA, Red point, benchmark, Intel Capital, General Atlantic, and Insight Venture Partners. All such investors are interested in the technological ventures proposed by the firms of Brazil and have pooled in heavy funds. Over the past 15 years, Brazil has evolved into a massive equity capital market. In 2010, it was recorded that Brazil firms have earned private equity investments of around $4 billion U.S dollars. The private equity industry of Brazil has taken advantage from the macroeconomic development. The history of Brazil is evident that private equity capitalization began in 1994 because of inflation and higher interest rates. In 1998, Brazil firms collected investments of US $37 billion from the private equity industry. Nevertheless after the uncertainty of macroeconomics in the period 2001-2004, private equity stabilized and matured over the period 2005-2010. The current condition of private equity industry of Brazil is getting better, and around 150 investors are contributing to the industry. However with the growing private equity industry, the survey conducted by INSEAD-PwC 2011, drew attention towards the perceived risks and how the structure of firms mitigate risks.
Following is the list of firms who have earned equity capital from the different Investors (Business Angels, Venture Capital, and Private Equity) along with the web links:
The table above shows the firms in various sectors of technology and healthcare and their investors. Brazil is an evolving market with the promising investors interested in investing in the technological ventures proposed by the companies. Business angels of Brazil emphasize on playing the role of broker between investors and capital seeking entrepreneurship. The objective of the private equity industry is to provide companies with funds to carry out their operations. Nevertheless, investors such as venture capitalists and business angels are interested in the emerging new companies with the growth potential. Private equity industry also seeks out investors for the emerging companies in the Brazil. Companies interested in collecting funds from the investors post add about nature of the business, business field and other related information to attract investors. Private equity industry also provides platforms to the emerging companies to showcase their talent to attract investors. The owner and investors share the capital raised by the emerging companies. Equity capital raised by the firms of Brazil is shared among the stockholders. General partners and limited partners have their share in the capital raised by the emerging companies.
It is concluded that with the evolving Brazilian market, the private equity industry is expanding with the increasing number of interested investors and innovative emerging companies. Brazilian firm owners seek out for investors with their innovative business proposals and investors such as business angels or venture capitals invest in the business with the intention of receiving capital as well as a desire to be part of the innovative business technology.
References
Chand, S. (2015). 5 Essential sources of equity financing|Company Management. Retrieved from http://www.yourarticlelibrary.com/management/5-essential-sources-of-equity-financing-company-management/5401/
Davis, J. S. (2015). The macroeconomic effects of debt- and equity-based capital inflows. Journal of Macroeconomics, 4681-95. doi:10.1016/j.jmacro.2015.07.006 , 46 (1), 81-95.
The Brazil Business. (2016). How To Become An Angel Investor In Brazil. Retrieved from http://thebrazilbusiness.com/article/how-to-become-an-angel-investor-in-brazil
