Partnering with an investor is one of the most significant decisions you can make as a small business owner. The right investor can provide capital and resource opportunities. They also add another voice and perspective to your business.
If you’re thinking of seeking an investor for your company, here are some important considerations to keep in mind.
Questions to ask yourself before partnering with an investor
Here are some questions entrepreneurs need to ask themselves when considering taking on an investor:
- Do you specifically need investor capital? While an influx of capital can grow your business and present new opportunities, it comes with certain compromises, including shared ownership. Analyze your needs, projections, and goals to determine if investor capital is what your business needs right now.
- Do you want a partner? Partnering with an investor adds another voice to your everyday business decisions. When taking on investors, you’ll need to be comfortable with sharing your decision-making power with another person or multiple people.
- Do you have a defined business plan and goal? Investors want to see how you’re going to use their money to grow your company and increase their initial investment. Before seriously pitching investors, have a business plan with clearly defined goals and projections in place. Within the plan, clearly outline your plans to use their money and how they will recoup their investment.
- Can you network? Finding the right investment partner takes time. Most of them are not openly looking to invest their money in a stranger’s business. As an entrepreneur, you’ll need to meet and form connections with prospective investors before you pitch them. Networking with investors is an opportunity for both parties to build trust and see if a partnership is right for both sides.
- Does your service or product have a clear, unique value to the market? Investors want to know their investment is protected and the business can compete in the marketplace. Within your business plan, highlight why your business offers a unique value to consumers and how you’ll market it effectively.
[Read more: Bootstrapping vs. Raising Venture Capital: Which is Right for Your Business?]
Investor motivations
Investors are taking a risk by investing, and they do so with the expectation that if their informed gamble pays off, they will reap financial rewards. Their top motivations for investing include:
- Equity shares. In return for their funds, investors receive an equity share in your company. As a result, they will get a percentage of the funds if the company is sold or liquidated.
- Business decisions. Be prepared to give investors some decision-making power. If you are not the majority shareholder, you could be out-voted and even voted out. This gives some entrepreneurs — especially those who want to keep a family-run business — a reason to pause before seeking investors.
- Eventual sale or initial public offering (IPO). For many investors, the ideal business owner will have an exit plan because most investors are interested in companies that have a high likelihood of being bought or going public. “Investment by outsiders is for scalable, defensible, high-profile startups with proven management teams,” according to an article on Bplans, a resource site for entrepreneurs. “Unscalable services don’t attract professional investors. And there has to be a real commitment to a credible exit strategy in three to five years. If you don’t like these criteria, rewrite your business plan to need less investment.”
- Ensured success. Many investors are also motivated to mentor you, sharing their experience and skills, to ensure the venture in which they placed their funding is going to succeed. Your investors may also have professional and financial connections that can help your business grow. The level of their involvement will vary by the type of investor as well as the personality of that individual or the approach of that investment group.
While an influx of capital can grow your business and present new opportunities, it comes with certain compromises, including shared ownership.
Types of investors
Your financial needs will vary depending on your business’s current stage of growth. While the below types of investors can provide funding at any point during your startup journey, some are more suited for pre-launch and early stages of growth, while others may be more beneficial as you prepare to sell your company.
Angel investors
An angel investor may be an individual or a group. These investors generally invest early using their own money. Like most investors, they want to find companies that have the potential for growth and will result in a good ROI for them. Bplans suggests some sources for finding these investors, including your local Small Business Development Center (SBDC), and online platforms, such as Gust Angel Network and AngelList.
Peer-to-peer lenders/personal investors
A peer-to-peer lender or loan is an individual or group that invests in a company directly, without the help of a middleman, such as a bank or investment firm. These lenders connect entrepreneurial borrowers directly with investments through a brokerage website that will set the rates and enable transactions between both parties.
Venture capitalist (VC)
Venture capital (VC) is generally provided by a VC firm, which manages finances from many investors and looks for very specific types of companies to invest in. They invest in high-risk opportunities that have high ROI potential. The investment is considered long-term at upwards of five to eight years because that’s how long it generally takes for a company to become ready to be sold or to go public. This is the outcome most VC firms desire, and it will likely influence the way they steer your business.
There are two main types of VCs: early-stage and late-stage. An early-stage VC is looking for companies that have proven their concept and are generating some revenue. These companies have reached a point where funds are needed to build out sales and marketing efforts so that they can grow. This funding would be for companies in Series A and potentially Series B.
Late-stage VC is invested in companies in Series C or beyond that are well positioned for sale or IPO. These companies are generally known in their market and may be ready to expand into other markets. The risk to investors may potentially be lower at this stage as the company may be cash-flow positive and have a solid understanding of how to grow.
[Read more: Need to Raise Business Capital? Know These 5 Funding Rounds]
Crowdfunding
The internet has made raising funds from non-professional investors even easier. Crowdfunding platforms, such as Indiegogo, SeedInvest Technology, and GoFundMe, connect entrepreneurs, artists, and project managers with an audience that can help them meet their fundraising goals. Because crowdfunding platforms encourage smaller investments from a larger population, companies typically do not have to give up equity or stakes in their business. In exchange, they will give their investors first access to a product, select input, and other exclusive features.
How to land an investment deal
Present hard data
The best way to sell your company is through hard data. Show prospective investors how you’ve grown and made a profit to this point, and how you plan to continue to do so. Don’t oversell your business or fudge the numbers to entice investors.
Present a clear investment structure and plan
When an investor buys ownership of a company, they'll want to know the business structure for regaining their investment and what other parties are involved in. In your pitch, have a clear investment structure ready, laying out the investor’s rights and obligations. This plan does not need to be final and may take some negotiating on both sides before being approved.
Address your vulnerabilities
After your pitch, the investor will likely ask questions about your operational, financial, and competitive vulnerabilities. To satisfy their inquiries, adopt their mindset and give thorough and honest answers to their concerns.
[Read more: 3 Practical Tips for Attracting Investors]
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