Entrepreneur's Handbook
FINANCING TYPES TO FIND EQUITY
Equity financing basically takes two forms. These are:
- The entrepreneur putting his own money as capital or getting a partner in the venture
- Using the resources created in the business (auto-financing),
In entrepreneurship, financing with equity is whether entrepreneur partners put their own money as a resource to the business or taking advantage of the resources of these partners by getting new partners from outside. Here, entrepreneurs or entrepreneurs either provide capital to the business by putting their own money or fund is provided through new partners. The main financial resources that can be used at this point are angel investors, venture capital and going public.
Another source is the situation that occurs after the establishment of the business. When the enterprise is successful and the enterprise makes a profit, net profit is found by deducting the taxes payable from the profit of the enterprise from the profit of the period. The net profit belongs to the entrepreneur and, if any, partners who are the business partners. The business partners, if they wish, take the part after deducting some amounts (legal reserves) that need to be set aside from the profit, or leave the remaining part or all of the net profit after deducting the legal reserves. Here, these amounts left in the business provide auto-financing (financing with the resources created by the business) and form a type of equity and financing (Aktaş, 2017).
The main types of financial resources for entrepreneurs to find partners are angel investors, venture capital companies, and going public. The figure below provides information
about which resources at which stage entrepreneurs benefit most while growing their business:
As can be seen in the figure below, angel investors can be used to find partners early in the business and then venture capital can be used to grow the business.
3.1. Angel Investors
Entrepreneurs initially set up their business with their equity capital or the capital they get from their spouses and circles. These investors, known as angel investors in the literature and Individual Participation Funders in Turkey, support entrepreneurs at an early stage. Angel investors are wealthy individuals who generally support small amounts (100,000 TL-1,000,000 TL) of financing and with this financing in terms of sales, marketing
human resource procurement and training, and management, which are more risky in terms of investment. According to the Regulation on Individual Participation Capital published in the Official Gazette on 15.02.2013 by the Undersecretariat of Treasury in Turkey Individual Participation Investors are defined as real persons who meet the experience criteria as working at least in the position of Assistant General Manager in a company with an annual income of at least 200.000 TL or the sum of movable and real estate assets of 1.000.000 TL in two calendar years, at least two years in the last 5 years, with an annual turnover of 25.000.000 TL, etc.and transfer their personal tangible assets and experiences to start-up companies” (Er, vd., 2015:40).
As you can see, business angels become partners in the business in return for the funds they provide and gain control over the management. Angel investors not only provide financial support to the entrepreneur, but also support the business network and know-how, as emphasized in Chapter 9. Perhaps these two supports are more important than the financial support provided to the entrepreneur. Because, in order for the entrepreneur to grow the business, it is necessary to grow the business network and to improve his technical knowledge about his business.
The goal of business angels is not to remain permanent partners in the firm. Business angels with an exit strategy, such as an IPO or selling their shares to other investors, the first owners of the project idea, or to other firms, usually plan to exit the company within 5-7 years. Business angels do not finance every project, but original projects with high success.
3.2. Risk (Venture) Capital
Risk or venture capital is a partnership-based form of investment financing that enables young and fast-growing companies with insufficient financial strength to realize their investment ideas. Venture capital takes less risk compared to an angel investor, as it supports the entrepreneur who is in the later stage of the investment, not the beginning.
The first venture capital in Turkey was made by banks. The first company established for this purpose was Vakıf Risk A.Ş. and currently, there are a total of 12 venture capital investment trusts (GSYO) companies in Turkey, 6 of which are public. Although GSYOs carry different investment alternatives, venture capital investments constitute an important weight among investment alternatives. This weight is increasing day by day (Er,vd., 2015:36-38).
Venture capital investment trusts in Turkey do not invest in seed stage ventures because they find them risky. The entrepreneurs preferred in Turkey are entrepreneurs who have passed the idea stage, have established their company and started to make a profit, but need financing in order to grow and continue their investments.
As you can see, the venture capital firm invests in the venture as an equity capital and thus takes over a part of the company's control right. However, it reflects its management experience to the invested company. Venture capital companies, like angel investors, provide not only financial support but also network and knowhow support to the entrepreneur.
The venture capital company also wants to exit the partnership by selling its shares after a certain period of time. Entrepreneurs who will use business angels and venture capital should have very good projects. In addition, it is vital that the company established has a
growth potential and entrepreneurs have a willingness to share control of the company in terms of receiving this support.
3.3. Going Public
It is important which legal company structure entrepreneurs will choose when establishing a company. Limited company, which has a legal personality structure, is more in number than joint stock companies in our country. Most of this choice is not based on conscious choice. For example, with the latest amendment to the Turkish Commercial Code, the joint stock company structure has become more attractive compared to the limited company structure. In addition to these attractive aspects, joint stock companies also provide an advantage in terms of growth in terms of opening up to the public and allowing to strengthen equity. The company that goes public finds a new partner for itself. New partners acquire the rights provided by the stock by buying shares from the company. These rights are:
- Right to share profit
- Right to share in liquidation
- Right to get free shares
- Right to get new shares (priority right)
- Right to attend the general assembly
- Right to vote
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- Right to review and audit
First of all, what should be known is that only joint stock companies have the right to go public according to the Capital Market Law. Joint stock companies have a procedure to follow in order to offer stocks to the public. The most important stage of this procedure is obtaining permission from the Capital Markets Board for public offering. A joint stock company that offers its shares to the public becomes a public joint stock company after the offering is completed. Public joint stock companies can then sell the shares representing the increased capital to their existing shareholders (investors who still hold the company's shares) when they need financing, by exercising their pre-emptive rights. Fund can also be obtained by selling the shares remaining after the use of pre-emptive rights (shares remaining from existing partners who do not want to buy new shares, representing the capital increased by using their pre-emptive rights) through public offering. Such public offerings are called "secondary public offerings". A public joint stock company may also sell shares representing the increased capital to certain investors, restricting the pre-emptive rights of existing shareholders partially or completely. This type of sale of shares is called "private placement". As stated before, only joint stock companies can obtain funds from the capital market in the form of equity by offering their shares to the public. (Aktaş vd., 2017:138).