Fools rush in…
Friday, December 5, 2008/
Getting an equity investor is a big step, especially now. Here are some tips to make the task easier. GAIL GERONIMOS
Getting an equity investor is a big step. Do your research and ask lots of questions and you’ll have a much better chance of a successful result. It is far too important to rush.
The key here is to start the process before you become desperate for cash.
Just before I go into equity investment, I’ll cover organic growth. When a company can fund its future plans from the profit being generated from the existing business, then you don’t need to raise equity funding. You can fund your growth from the existing operation.
However, for those companies in very competitive markets, or those that need a big investment in technology, this is generally not possible. These companies become very hungry for cash. A bit like a growing teenager – never stops eating to provide the fuel for fast growth.
What are the advantages of raising capital?
- Angel investors and venture capitalists will help you achieve high growth.
- Investors have great networks and can give you valuable introductions.
- You don’t have to pay the investment back at regular intervals. Great for your cashflow.
- Equity investors generally provide lots of advice, so it is “smart” money.
- Investors also bring a higher degree of discipline in running the business.
- Equity investment can attract additional investors and provide leverage.
What are the disadvantages?
- Investors will take a share of your business (and your profit).
- They will want to be involved in running the business. This can be both positive and negative depending on your own style and the style of the investor.
- Investors expect high returns so you’ll need to work hard post investment.
The reason most companies seek equity investment is that they have run out of debt funding and they need additional capital:
- To employ more staff.
- For further product development.
- To enter new markets.
- To expand operations into new territories.
- To build manufacturing facilities.
- Etc, etc.
With equity investment you are able to achieve substantial growth and it happens quickly. You can add a competitive edge to your product through technology innovation, you can get into overseas markets, you can acquire a few competitors, you can put in place big marketing plans, etc. And the list goes on.
There are very good reasons to take on board an equity investor. However, life will change for you and your staff. It is a big decision and you’ll need to carefully assess if it will suit your business.
Some tips before you take on an equity investor…
- Research your prospective investor, get information on the company.
- Make a list of what you need from an investor and make sure that the investor can provide what you need – it’s not just the money.
- Interview the investors as much as they interview you.
- Make sure that you understand what they want so that your interests and future plans align with their interests.
- Talk to other CEOs who have taken on an investor.
- Contact companies that the investors have funded. Talk to the CEO. What are they like as investors? How much did they want to get involved? Were they particularly intrusive? What are they like to work with?
This is a big step, and the more research and preparation you do the better will be the result. If you go in with your eyes open then you won’t have too many surprises waiting for you.
You’ll never anticipate everything that may happen. If you can cover 80% of the issues before you sign the deal then you will most likely have a good relationship with your investor.
And this is very important. Keep your relationships positive. You’ll have ups and downs and rocky times. This is a small world so build very positive relationships with investors and you will be more successful. There is no doubt about that.
Here is a link to my interviews with some investors. Check it out, you’ll learn a lot.
Feel free to email me with any questions or comments.
That’s it for now. Till next week…
Gail Geronimos, is the founder of Achaeus, which helps entrepreneurs develop their businesses and she has just started a new site www.pitchingtoinvestors.com with tools and tips about how to develop killer presentations to raise capital.
To read more Gail Geronimos blogs, click here.