Private Equity in various forms is probably the preferred form of financing for small start-ups. The basic idea is that the investor pumps in capital in return for a stake in the company. Since start-up is concerned, this is the kind of investment is often in the form of risk capital.
This funding is especially important if the business start-up is based on a new idea or even unproven technology. Without prior track record, the principal of such start-ups find it difficult to get the kind of resources needed to grow the business from concept to profitability. Injection of venture capital allows the company to focus on building up infrastructure and brand.
Venture capitalists expect a big return on their investment compared to the commercial lender. But as noted above, start ups have neither the necessary financial transactions nor proven business model. If the idea or its implementation turns out to be a dud, the principal will not have to pay back the VC funds.
Unlike commercial lenders, VC funds expect big returns on their investment. Of course, they also take risks where the typical entrepreneur has no track record nor tested business model. If not starting to take off, VC lose their investment. Note that the commercial lender wants only interested in loan principal, but VC funds expect big returns on their investment. This is only fair, as they are taking a leap of faith by starting where the returns are never guaranteed. VC can and sometimes lose his shirt.
An important issue here is the best way to find venture capital. One method that has helped a number of start-ups is to seek help from a start-up incubator. The primary benefit is to be supported by an incubator provides access to angel investors and venture capital.
But there is much more that the incubator can help with, including providing mentorship and member of the advisory role. Not to mention things like regulatory compliance and preservation of intellectual property. These are all things that many founders often neglect because of their focus on core business.
Bottom Line is a private equity investment in an entrepreneur is not just a business transaction in which an investor buys shares. In this case, venture capital or support from the incubator is more an expression of faith. It says that the VC fund or incubator believes in the potential and ability of the entrepreneur to succeed.