The Significance of Mezzanine Capital in Funding a Business

Mezzanine Capital, also known as Mezzanine Debt, is a type of liability funding that comprises equity-based option, such as rights and warrants, and a lower-priority debt. It is a hybrid debt matter that is in subordinate to an existing debt, a debt provided by senior lenders such as banks and venture capital investors. It is frequently used in financing acquisitions and buyouts where it can be used to prioritize new owners ahead of existing owners in the event that a bankruptcy occurs. It basically gives the lender the right to assume ownership of the company if the debt is not paid back in time and in full.

Mezzanine capital is commonly used by companies beyond the start-up phase but before initial public offering or IPO, to fund the last stage of the projects or to fund unexpected operational costs before going public. This unsecured form of funding usually involves attachment of security interest to the stock of a corporation and does not attach a security interest on its physical asset. Because mezzanine debt is unsecured, lenders typically charge a higher interest rate more than on senior debt instruments. For some riskier projects such as real estate business, the interest rate differs significantly. Hence, many companies try to seek other less expensive forms of debts before acquiring mezzanine debt.

Mezzanine debt behaves more like a stock than a debt because of the enclosed options that include stock call options, rights, and warrants. Oftentimes it is an expensive source of funding than secured debt or senior debt. Nevertheless, it is advantageous because it is treated more like equity on a company’s balance sheet and may make it easier to acquire standard bank financing. It does not require collateral and no typical inspections just like in a typical conventional lender, thus, providing the mezzanine capital quickly. However, if the borrower defaults, the lender therefore will be entitled to receive ownership interests in the entire corporation, including all physical assets and liabilities. 

Companies who invest mezzanine capital should be profitable. They must have proven track record in their chosen industry with established reputation and product, a history of profitability, and should have a viable expansion plan to draw attention for future mezzanine funding. These are typically what these lenders look for since they offer high return of investment with high risk, and a placement agent is hired accordingly. They are an outside firm who would help market the lender’s fund to institutional investors.

What You Should Know About Angel Investors and Venture Capitalists

Angel Investor is also known as business angel or informal investor. The term Angel originally comes from Broadway that was used to describe wealthy individuals who provided money for theatrical productions. Angel investors are opulent individuals who organize themselves to provide seed capital for start-up businesses and share their knowledge to an entrepreneur on how to run the business. They mentor another generation of entrepreneurs by making use of their wide experiences and networks. Most of these investors are retired entrepreneurs or executives who are interested in investing their money and wanted to stay abreast of the business development apart from monetary return.  They are also good sources of useful contacts allowing entrepreneurs the opportunity to network with others in their industry.

According to a Harvard report by William R. Kerr, Josh Lerner, and Antoinette Schoar, start-up companies funded by angel investors are less likely to fail than those companies who rely on other forms of initial financing. Financial institutions like banks offer loans to entrepreneurs but they demand for payment of interest on the invested capital, while angel investors usually get considerable control over company’s decisions, apart from owning a significant portion of the company. 

Venture Capitalists, on the other hand, contrive the merged money of others in a professionally-managed fund. They are corporate entities that pool money from a range of institutional and individual investors. They usually possess greater expertise in leading companies through successive funding stages leading to an Initial Public Offering or IPO. For new companies with limited operating history and are too small to raise capital in the public markets, small companies that have not yet reached the point where they are able to obtain a bank loan or complete a debt offering,  Venture Capital is very much appealing. 

 Venture Capital firms are much less likely to invest in startup companies at the seed capital stage. This is because the range of venture capital transaction is large around US$500,000 to US$10 million, or above while the range of angel investor transaction is typically from US$25,000 to US$100,000 for an individual, and up to US$1 million, or more, when acting in a group. However, Venture capital may provide second round financing after angel investors.

The Difference between Angel Investors and Venture Capitalists

I have been doing some optimization jobs for entrepreneurs and investors’ website, but I do not have a full knowledge on what the business is really all about. All I know is that, this is about business investment, yet, I still can not figure out how it goes, and how it works. Until I made a little research, I completely understood on what type of business this website is offering.

I admit this is the first time I have encountered the words Angel Investor and Venture Capital. From my own point of view, without having knowledge yet of what an Angel Investor means, I thought it is an individual who seems like an angel lending his money to those who need capital for investment. And perhaps some necessary procedures must be followed and legal documents must be secured for this is a financial matter that is always a very sensitive case in regards to business.

According to Wikipedia, an Angel Investor is also known as business angel or informal investor, an affluent individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity. The term Angel originally comes from Broadway that was used to describe wealthy individuals who provided money for theatrical productions. http://en.wikipedia.org/wiki/Angel_investor

My own perception was not quite far from what Wikipedia has explained. So, Angel Investors typically invest their own fund. These opulent individuals organize themselves to share research and merge their own investment capital. Most of these investors are retired entrepreneurs or executives, who may be interested in angel investing for some reasons that go beyond monetary return, such as being  acquainted with the latest developments in the business sector, and mentoring another generation of entrepreneurs by making use of their experience and networks on a less than full-time basis.

According to a Harvard report (by William R. Kerr, Josh Lerner, and Antoinette Schoar), start-up companies funded by Angel Investors are less likely to fail than those companies who rely on other forms of initial financing.

Venture Capitalists on the other hand, contrive the merged money of others in a professionally-managed fund. It is a capital provided to early-stage, high potential, growth start-up companies. The venture capital fund makes money by owning equity in the companies it invests in, which usually have a novel technology or business model in high technology industries, such as biotechnology, IT, software, etc. http://en.wikipedia.org/wiki/Venture_capital

 

For new companies with limited operating history and are too small to raise capital in the public markets, Venture Capital is very much appealing. Basically, these small companies have not yet reached the point where they are able to obtain a bank loan or complete a debt offering. Investing in small and less mature companies is risky for Venture Capitalists and so they usually get considerable control over company’s decisions, apart from owning a significant portion of the company.