Keeping Control

Business owners also use investor money to pay down bank debt if they are overextended, and to get more favorable bank terms. “A lot of banks ask for personal guarantees from CEOs of early-stage and emerging-growth companies,” says Sima Griffith, founder and managing principal of Aethlon Capital, an investment bank based in Minneapolis. Banks may remove that requirement once an outside equity investor is part of the picture, allowing the owner to separate personal and business liabilities.

There are a number of places to find minority financing. In such a strong market, business owners have choices to make. Understanding possible minority funding sources and their relative strengths and pitfalls will help make those choices good ones.

Early Stages: Angel Investors and Venture Capital

For some companies, high-net-worth individuals—also called angel investors—are the first place to look for funding after friends, family, and bank-debt options are exhausted. Angel investors can be a good choice for companies who want to raise less than $5 million.

Duluth’s Cirrus Industries, the world’s second-largest producer of single-engine, piston-powered aircraft, raised a total of $2.5 million from 12 current and retired CEOs, most of whom are private pilots. The CEOs “understood the huge market opportunity,” says Griffith, whose company arranged the deal.

Angel investor money isn’t cheap. Ted Christianson, managing director and group head for the private placement group at Piper Jaffray, a financial services company in Minneapolis, estimates that a typical individual investor might expect a 50 percent annual rate of return, particularly if the investment is made during an early stage of the company’s development.

Companies that want to raise $5 million or more, however, will find it much more efficient to locate a single institutional investor, Chistianson says. Having one investor also simplifies investor relations.