Seed Funding, Private Equity and ICO
Seed funding is the first round of funding sought by founders of a startup by external investors. It is the round of funding through which a business idea grows into a business. This investment into the startup helps it reach a stage of profitability. Funds raised through this round are generally used for the growth of the business which includes buying the necessary equipment, renting office spaces, hiring manpower and experts, legal costs, product development, research, and development, etc. Generally, the investors in this round of funding are called 'angel investors' as they are willing to take on a riskier investment into a business that has no track record to back its claims regarding its profit-making potential. Venture capitalists invest in exchange for equity in the business and on the basis of the potential and reliability of the founders of the business. If the business goes on to flourish, the angel investors gain in the form of an increase in the business's value and thereby increase in share prices. The highly valuable equity shares in a growing business can also be sold by the venture capital investors to new investors at higher prices, than the invested amounts. Therefore, sometimes these risky seed funding opportunities translate into very lucrative opportunities to reap high returns. Post the seed funding, startups raise funds through Series A, Series B, and Series C rounds of funding and gradually move towards an initial public offering.
Private equity (PE) investment is sought by a company when it requires large investments for a prolonged duration of time. Large accredited or institutional investors make such investments which are used for the expansion of the business like acquiring new ventures and expanding productions. This form of funding serves as an alternative for companies to raise funds instead of relying on high-interest bank loans or restrictive public market regulations. These investments are generally suitable for companies that have had a good track record in terms of profits and therefore present a good opportunity for high returns. Usual PE investments are made for a period of 4-7 years with a detailed exit strategy in place. PE investors normally acquire a 35% - 50% stake in the target company and generally hold such investments in a slew of companies. Investments by PE funds are usually made through the execution of share purchase agreements and shareholders agreements. These holdings of the PE firms are called their investment portfolio.
Initial Coin Offering (ICO) is an initial public offering in cryptocurrencies. This method of raising funds is generally used by startups and is done through the blockchain. As a part of this method, the target company creates some fungible and tradeable tokens on the blockchain which are representative of its assets. These tokens are unlike stocks in an IPO as no equity stake is transferred by the purchase of these tokens. However, these tokens represent a stake in a product or service which has been created by the company.
There are two types of ICOs, public and private. Private ICO is open for participation to only a select few investors, while public ICOs target the general public. Similar to initial public offerings, public ICO is being increasingly regulated. Therefore most startups are leaning towards private ICOs. This method removes intermediaries from the process of finding investors.
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