What’s the difference between a small business and a start-up? Start-ups have the potential for explosive growth and outsized returns for their investors. Small businesses don’t. Unfortunately for small businesses, this makes it very difficult to raise money with traditional equity.
As with any business, a small business can only raise so much debt. Whether this is with bank loans, government sponsored loans or revenue backed loans, debt has its limits in terms of investor appetite and business prudence.
So, small businesses need to raise non-debt financing. Small businesses aren’t public, so they need to find funding in the private market for equity capital. This market is made up primarily of two types of investors:
Since small businesses are neither large nor start-ups, they are currently not served by the private equity market.
The solution lies with venture investors and the investment that is used. One reason why venture investors only invest in companies with very high potential returns is that they need high returns to cover the cost of underwriting small equity investments. To buy equity, investors need to spend time to understand all the many factors that can affect equity returns and determine a value for the company. This is time consuming and expensive.
Seats solves this problem by making investing in any type of business easy. Investors only need to determine the probability of a certain level of revenue occurring.
With Seats, venture funds and individuals can invest in all types of businesses, from their favorite local restaurant to the hottest Silicon Valley tech start-up, using the same type of investment. There’s no need to value companies or worry about all the noise that comes along with equity investment.
Additionally, it is possible for a venture investor to shoot for very high returns from a small business with Seats, where this might not be possible with equity. This is because with equity the investor gets the benefit of all the potential outcomes – the likely cash flows as well as the upside, risky cash flows. This dampens the return of equity, especially for a stable, low growth small business. On the other hand, with Seats an investor can isolate the upside, speculative revenues and earn a high return for taking this risk.
In sum, Seats solves the problem of the funding gap for small business by being easier and more tailored for investors. This will level the playing field for small businesses and make investing a lot more interesting for everyone.