Entrepreneurship is a thrilling journey that often begins with a spark of creativity and a burning desire to bring innovative solutions to the world. Young entrepreneurs possess fresh perspectives and boundless energy. However, turning these ideas into successful businesses requires more than just passion – it demands resources, guidance, and financial capital. In this blog post, we will explore how access to equity investments plays a pivotal role in helping entrepreneurs, especially young ones, realize their business ideas and contribute to society.
What Is Equity?
Equity stands for ownership in a company. When entrepreneurs start a business, they typically divide ownership into shares. These shares are distributed among founders, investors, and other stakeholders (sometimes employees). Equity capital investing is a powerful tool because it aligns interests: as the company grows in value, so does the value of each share. Equity investing is often performed by alternative investment funds, private equity funds, or VC funds, which function as intermediaries between professional investors and entrepreneurs.
Croatian Bank for Reconstruction and Development (HBOR) is striving to support the whole lifecycle of Croatian companies by helping entrepreneurs access credit and capital. Our equity investment programs primarily support the establishment of new alternative investment funds. Since we are positioned as a public investor in this effort, we try to combine the vision of Croatian and EU inclusive and sustainable growth with equity investing. We believe equity investments play a crucial role in promoting social equity by:
- Improving access to opportunities: When entrepreneurs, regardless of their background, have access to capital, they can turn their ideas into reality. This democratization of opportunity helps level the playing field and ensures that talented individuals, regardless of their socioeconomic status, can contribute to society.
- Addressing wealth disparities: Historically, wealth disparities have deepened social inequality. Equity investments offer a path to wealth creation beyond employment. When employees receive stock options or take part in stock ownership plans (ESOPs), they take part in the company’s success. This shared prosperity helps narrow the wealth gap and promotes a fairer society.
- Aiding community development: Equity investments are not limited to Silicon Valley startups. They also fuel local businesses, community projects, and social enterprises worldwide. When investors support businesses in underdeveloped neighbourhoods or invest in clean power generation, they contribute to community development and play a role in building resilient communities.
Equity Investment Benefits
Naturally, benefits resulting from improved access to capital are immense for entrepreneurs:
Capital Injection
Equity investments supply much-needed capital. Unlike loans (which require repayment), equity funding does not burden entrepreneurs with immediate financial obligations. Added capital allows entrepreneurs to hire talent, develop products, and scale operations.
Risk Sharing
Starting a business involves financial, operational, and market-related risks. When entrepreneurs share ownership with investors, they also share the risks. Investors become partners in the journey, providing mentorship, expertise, and guidance. This collaborative approach improves the chances of success. It is reasonable to expect creditors will also appreciate a larger equity stake, or larger participation in risk by the owners of the business.
Long-Term Vision
Equity investors think long-term. They are not looking for quick returns; instead, they believe in the company’s potential to grow over time. This aligns perfectly with an entrepreneur’s vision. Together, they build for the future, focusing on sustainable growth rather than short-term gains.
Unlocking Networks
Investors should provide access to valuable networks, industry connections and potential customers. Young entrepreneurs can greatly benefit from these networks, gaining access to resources that accelerate their business growth.
Challenges and Concerns for Entrepreneurs
While equity investments offer significant advantages, entrepreneurs must carefully navigate the challenges they bring:
- Dilution: As more investors come on board, the founder’s ownership share (%) decreases. For entrepreneurs, it is crucial to achieve the delicate balance between dilution and the need for capital by proper timing and size of financing rounds.
- Valuation: Determining the company’s value during fundraising can be complex. Entrepreneurs try to negotiate fair valuations to avoid giving away a large share in your company.
- Exit Strategies: Equity investors expect returns in the medium to long term. Entrepreneurs plan an exit strategy, such as IPO or acquisition, to give back returns and liquidity to investors. We admit we are sometimes impatient with this aspect of investing.
- Inexperience:Entrepreneurs are often inexperienced in equity transactions in comparison to fund managers. Entrepreneurs carefully read your Articles of Association and know your rights as co-owners!
Few takeaways
Equity investments empower entrepreneurs to dream big, take risks, and turn their ideas into reality. By embracing equity, young entrepreneurs can build thriving businesses that shape the future. So, whether you are a founder seeking capital or an investor looking for promising ventures, equity is the bridge that connects innovation to success. HBOR will continue to support this vision by using available resources and developing equity investment programs. This experience is sometimes humbling, but we believe dedication will shape a better entrepreneurial environment in Croatia.
Dear reader, remember that equity is not merely financial – it is about fairness, inclusion, and shared ambition. Whether you are an investor or an entrepreneur, your equity story shapes your journey. Discuss our vision of equity investing in Croatia during LEAP Summit 2024.
