If you are looking to start up or scale your business, you may be looking to find an investor. In addition to providing the much-needed capital, investors may also be offering to provide invaluable mentorship, guidance and access to their network and connections to help you get the most from the arrangement.
Choosing the right investor
As a business owner, it’s important to know from the outset what you would like to gain from bringing in an investor. Are you looking for an investor that would have an active role or say in the company, or are you only looking for financial investment?
While it is good to have a preference, it would be wise not to rule out active investors altogether. It could be that your search for an investor brings you to valuable contributors who can help to ensure the success of your business.
Each potential investor will have a slightly different skillset, background, and area of expertise; if you choose wisely, your investor will help your business to flourish.
Keep in mind that an investor who understands your industry or product can be a great asset, while an investor who does not could be a hinderance. Personality is less important, but also a key consideration. You will likely need somebody you can communicate comfortably with, when it comes to big decisions and forks in the road.
Different types of investor
There are different kinds of investors in the market, offering different propositions to target companies.
Angel investors are typically wealthy individuals who wish to grow their capital and/or support worthwhile causes, by investing some of their wealth in start-ups and fledgling businesses. Usually, the angel investor will provide funding by purchasing shares in the business. Quite often they are successful entrepreneurs themselves and can serve as mentors to support the growth of the company.
The pros of using an angel investor include:
- Unlike a loan, you are not expected to pay back their investment. Their return comes from increase in share value as the business grows.
- Angel investors are more likely to ‘take a chance’ on a risky venture that has potential, whereas banks are not.
- Using an angel investor can increase your odds of success, as they usually bring valuable experience and skills to the table.
The cons of using an angel investor can include:
- You may not have to repay the investment, but you are signing away a portion of your future earnings.
- Angel investors have high expectations. Their return depends on business growth, so they may set the bar high.
- By selling a portion of the company to the angel investor, you are relinquishing some control over the business.
Venture capitalists also invest money in businesses by purchasing a share. However, unlike angel investors, venture capitalists are typically looking to invest millions. They work less frequently with new businesses, instead opting to fund relatively ‘safe’ ventures made by established businesses. These investors often go beyond the mentorship role taken by angel investors and will likely want a say in, or control of, key management decisions.
The pros of using a venture capitalist include:
- They have the means to invest large sums of money
- Their focus will be on driving growth to increase equity value
The cons of using a venture capitalist can include:
- They rarely invest in small businesses or any venture that is deemed risky
- You will likely have to surrender a great deal of control over the business
A personal investor is somebody personally known to the business owner, such as a friend, family member or colleague. This type of investment is very common and is often the perfect solution for small businesses who do not need to raise vast sums of money. Whether you are borrowing money or issuing shares, using a personal investor does come with its own unique set of risks.
If your venture is unsuccessful you may damage a friend or family member’s finances, or permanently harm your relationship.
The pros of using a personal investor include:
- People who know you and believe in you are more likely to buy into your idea
- They are often the most suitable option for small businesses that do not need a great deal of funding
- The process of establishing an agreement is usually far less time consuming than it would be with other types of investor
The ‘con’s of using a personal investor can include:
- It can put pressure on personal relationships
- You risk damaging their finances
- They may not have the entrepreneurial knowledge to support your venture in the same way as an angel investor would
How to find investors
Finding an investor that you would like to work with can take months. When you have found a suitable investor to approach, make sure you have an airtight pitch before making contact. Securing financial investment will take more than enthusiasm and a good idea – though these are important strings to your bow.
Maximise your chances of bringing an investor on board with the following tips:
Have a clear proposition
This is what makes your idea unique; it is the problem your idea solves, or the way in which it does so that is superior to your competitors. Your proposition is what will ultimately inspire investors to buy into your idea, so you need to drive it home.
Tailor your pitch to your investor
Casting your net wide by seeking to appeal to a broad range of potential investors will weaken your position. You may stir moderate interest in more people, but none will be moved to the degree that they wish to invest in your product. Find the right investor for your project and then tailor your pitch to reel them in.
Consider the way you present yourself
Though most people would agree that a good idea should speak for itself, this is sadly not the way the world works. An investor is far more likely to buy into an idea they like if they also like the person selling it. Enthusiasm is infectious, so displaying your passion for your idea is key. However, being overly zealous can also be detrimental; you must be taken seriously.
Have a solid business plan
Just as you would expect from a bank, investors will want to see a solid business plan. Arguably, a business plan that you show to potential investors must be even more watertight than one you would show to a major lender. Remember, you are asking them to part with their own money. Do your homework, research the market, the competition, potential suppliers and target customers. Also make sure your business plan includes realistic financial forecasts.
Offer a strong incentive
This may seem obvious, but it is overlooked all too often. Make sure your pitch clearly explains the investor’s financial incentive. This could be shares or equity, ownership of property or other assets, or products rather than money. This should always be your focus, as an investor will not buy into an idea they like without the financial incentive, but they may go for the financial incentive without the inspirational idea. Tick both boxes and investors will be falling over themselves to back you.
Pitfalls to avoid!
Now that you know how to find investors and get them on board with your idea, consider a couple of common planning and pitching mistakes and do your best to avoid them.
Do not be afraid to consider selling your business on in future, or to show this to investors. The willingness to sell a growing company at the right time does not diminish your belief in your idea; in fact, it displays good business sense and will make genuine investors take you more seriously.
Do not set your funding target too low or too high. Setting the bar too high could mean you never get your idea off the ground and could put off investors, as they may be unwilling to part with a large sum of money, or unwilling to work with too many other investors. Looking for too low a sum can also put investors off, as they may feel your goals are unrealistic.
Finally, make a commitment to be honest about your weaknesses. If there are any potential stumbling blocks or weak areas in your business plan, do not try to hide them. Instead, point these weaknesses out and show that you have considered how to work around them, by offering potential solutions.
The matters contained in this article are intended to be for general information purposes only. This article does not constitute tax, financial or legal advice, nor is it a complete or authoritative statement of the rules and should not be treated as such.
Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission.
Before acting on any of the information contained herein, expert tax, financial, legal or other advice should be sought.