Types of Capital Infusion

There are several ways that companies can raise additional capital: debt, venture capital, mergers, private equity investment, and public offerings. This research briefly examines these types of capital infusion, and focuses on the initial public offering.

All methods of raising capital involve some cost. Raising capital through debt involves taking on interest charges, and companies may not be able to raise funds at competitive rates, depending on their credit history. In some cases, lenders have established debt-to-equity ratios which must be maintained by the company, which makes debt an unacceptable way to raise capital.

Venture capitalists look for a high rate of return on investments (30 to 40 percent on an annualized basis) and often require a predetermined exit strategy. This may include the sale of the company or a public offering to recoup their initial investment. Mergers can be a source of additional capital, but only if the target has excess surplus and the acquiring company has sufficient capital to make the acquisition or is willing to relinquish some level of control by paying stock for the acquired company. Private equity investment (other than venture capital) may be available, but private investors are likely to require a high rate of return, a degree of control over the company and, again, a guaranteed exit strategy.

A public offering occurs when a company sells shares of stock. An initia

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of increasing revenues and profitability. This should be augmented by strong and reputable management (in order to provide confidence to investors). A simple capital structure is preferable to a complex one not only because it makes the IPO itself easier, but also because it makes it easier for potential investors to evaluate the stock and the company to make their investment decision. Advantages of IPOs One of the most significant advantages to IPOs is that public investors, unlike venture capitalists, do not seek an immediate return on their investment. In fact, public investors can be less interested in dividend payments than in the stock's growth value, particularly when evaluating an IPO. This is an ideal situation for companies which can demonstrate slow but steady growth, as well as for companies which are participating in a market that is in the growth phase and which is characterized by strong increases in growth. Public investors generally do not seek a controlling involvement in the management of the companies in which they invest, although some limited involvement may occur. So long as there are no significant surprises, and the company avoids severe financial (or legal) troubles, public stockholders are pati

Category: Economics - T