Keeping Control

The next stop for an early-stage company might be a venture capital firm. With an expected return between 30 percent and 50 percent, venture capital money can be expensive, too. (A more developed company is apt to pay less than one at an earlier business stage.) And a venture capital firm may value a company for less than the owner thinks it’s worth, meaning that the investment would represent a larger equity stake than the owner might like.

But venture capital allows a company to deal with just one investor. Venture capital involvement also typically gives companies added credibility, which can help secure the next round of financing.

Courting venture capital probably means organizing the firm’s accounting, patent, and copyright status to industry standards, says Steve Hanson, partner and co-chair of the private equity practice group at Minneapolis law firm Dorsey & Whitney, LLP. “Friends and family aren’t going to do much due diligence, but venture capital companies are,” he says. Getting your house in order is likely to be a part of any future capital campaign, Hanson says, so it’s smart to begin using standard procedures early in the life of the firm.

The Next Step: Private Equity

A company with an established product, client base, and cash flow is likely eligible for private equity investment (or late-stage venture capital). Both are cheaper than capital from angel investors, with an expected return between 15 percent and 30 percent.

In the past, private equity firms mostly purchased companies outright. Recently, however, they’ve been more willing to consider minority equity in- vestments. “Most of these guys originally stuck to buyouts, and that’s still often true,” says Christopher Kampe, a director in Boston with Grant Thornton Corporate Finance, LLP, an investment banking firm owned by Chicago-based accounting firm Grant Thornton, LLP. “But the market has become more competitive, and so many private equity groups will consider minority investment.”

Private equity groups structure minority investment in a variety of ways. Some might initially buy a majority stake and then offer the firm’s original owners a chance to earn part of the company back by meeting a series of performance targets, Cavanagh says.