What is the equity gap? How to close it?

What is the equity gap?

PThe equity gap refers to a lack of capital or funds for the operation of a particular business. It can occur at any stage of running your company, although it is most likely to appear at the beginning.

This problem most often affects small and medium-sized enterprises. The causes are usually:

• Economic conditions,
• High barriers to entry,
• The possible reluctance of banks to grant loans,
• Lack of experience of the owners,
• Uncertain business history,
• Low initial revenues,
• Inability to meet the requirements for obtaining capital from public funds,
• The attitude of investors, who usually prefer to support initiatives that have a high chance of success or that have been tested to some extent – in the case of young businesses, the risk is much higher, as nobody knows whether the market will positively accept the offered solutions. This is a common situation for startups.

How do you close the equity gap?

There are many ways to close equity gaps. Let’s take a look at them.

Private equity fund

A private equity fund is a form of investment that involves acquiring shares or stocks of selected companies and providing them with financial support through loans, bonds, and other instruments. Investors in a private equity fund can be various entities, such as organizations, financial institutions, companies, or individuals. The goal of the investment is to increase the value of the company and make a profit when it is sold. A private equity fund may support different types of ventures, such as mergers and acquisitions, cost optimization (e.g., implementing lean management), organizational changes, the purchase of real estate, equipment, and others.

Business angels

Another option is to use the help of business angels. These are usually private investors and businessmen who provide financial support to small, growing companies and startups. Apart from financial benefits, companies can expect strategic advice and expanded business contacts. The condition, however, is transferring a certain portion of the company’s shares. It is worth taking the initiative and looking for people in organized networks of business angels – EBAN or Cobin Angels. From time to time, there are also competitions for startups and innovators, where you can present your ideas and attract the interest of investors.

Crowdfunding

It takes place on specially created crowdfunding portals, where you can put an offer on your project, or business idea. For example, equity crowdfunding allows you to use listed financial instruments (shares, bonds). Investors who often seek to diversify their investment portfolio may also like to use such a solution.

Summary

Before you start looking for additional funds from investors, or grant programs, you should thoroughly review the situation in the company. Only after looking at the hard data will you be able to assess whether you really have the equity gap and where the problems lie. Getting the big picture will help you determine what you need and where to go for help.

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