A common question that business owners ask time and again is about taking on investment in their businesses. Looking to grow via investment is an exciting time for any business owner, but excitement is something that can quickly cloud judgement and lead to poor decisions being made. With that in mind, here is a quick overview of the main things you should consider when looking at taking on investment in your business.
Why do you want to take on an investor?
This first step is, surprisingly, the one most overlooked by business owners who are considering taking on investment. In the excitement of negotiations and big dollars the simple question – why are you doing this? – often gets skipped over. It is really important to consider this question carefully because once the deal is done it can be difficult and costly to undo and can be a real morale-destroyer. Think first, act second.
There are a range of reasons as to why you might take on investment, including:
* Growing the business via acquisition, marketing spend, hiring new staff, etc.
* Buying out an existing business partner
* Paying for R&D of a new product
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Regardless of the reason, make sure you have one and make it a good one!
How do I find an investor?
This is a tricky one and will really depend on the sort of business you operate and the sort of funding you’re after. Broadly speaking, most investment for companies at an early stage will come from yourself, friends and family. Tread carefully here because if things go badly you could have some awkward barbecues in your future.
Another option for early stage investment is via an angel fund. These funds are mostly made up of money invested by wealthy individuals looking for investments outside of the traditional options (i.e. not listed shares, term deposits, real estate, etc.) There are a few of them around and all will require you to pitch your plan to them (and dazzle them) in order to get any funding. This is where a solid business plan comes into play. Another similar option here is venture capital (VC) funding.
Check with your accountant or lawyer first, but Google will also be able to point you towards some options here.
What will the investor want?
Every investor works a little differently, but typically they are going to want to take a stake in your company in exchange for cash. Normally the cash will be earmarked for spending, usually in line with the agreed-upon business plans that formed part of the pitch when you went to get the money.
How this deal is structured will vary. Sometimes you’ll be issuing convertible notes (i.e. they give you cash as a loan which converts to equity if certain milestones are met). Sometimes it will just be a loan and other times it will be straight cash for equity. You should have a good understanding of what each entails (get good advice!) before agreeing to anything.
If you’re going an equity deal remember that this might not be the last time you seek funding so don’t dilute (i.e. shrink your shareholding) too much otherwise it’ll leave you with no wiggle room when it comes time to take on more investment.
Regardless of the form of the investment, any good investor is going to want regular reporting so they can keep an eye on their investment. This can come as a shock for small privately owned companies who haven’t had to report to anyone but themselves before and can take some time each month to do properly, so be prepared or get it outsourced.
What do I get from the investor aside from cash?
This is the smart money vs dumb money question. Smart money is when an investor gets involved in an advisory capacity with your business (think Shark Tank) whereas dumb money comes with no advice or assistance (think your bank).
Depending on your investor, having smart money can be much more valuable than simply just receiving the cash because of the advice and experience that it comes with. Think about it – the investor has made enough money that they can risk it on your venture, so surely they’ve made some good business decisions in their past! Take advantage of their experience and opt for the smart money – when the investor is someone you respect and trust it can add untold value to your business.
You may also find that the investor will be connected to other sources of funds so that when you’re ready there is access to more cash.
If you’ve decided that you need cash to implement your business plans but you’re not so keen on giving up a chunk of the business you could speak with your bank or ask the internet to find a range of non-traditional lenders that have cash for situations just like this. Another option would be to explore any grants and incentives that may be available to your business. Again, speak with your accountant and lawyer as they will no doubt have seen other deals and may have contacts for you.
Written by Ben Fletcher, managing director at Generate. A version of this article was originally posted on their Better Business blog.
Generate are not your typical accountants. We provide operational and strategic support to creative and innovative businesses of all stripes and colours.