How to Find Investors for your Company
Are you a small business looking for potential investors and unsure of how to start? We want to make it an easier decision for you so take a look at a few things to consider when starting this process. Prefer to listen instead of read? Check out our latest video HERE that explains this exact process.
Often one of the most challenging parts of making any decision is setting up the framework in which you can use to rationally walk through the process. This is intended to give you a starting point and hopefully guide your decision-making process. Here are the areas we will cover briefly:
1) Determining you need capital in the first place
2) Considering the drawbacks of giving up equity
3) Where to start your funding search
This isn’t meant to be an exhaustive and all-inclusive explanation of every consideration to make as that should be weighed in your exact decision, alongside an attorney, tax professional, and financial professional. This is, however, meant to help you start the process.
Determining you Need Capital
It can be sexy to think about bringing on partners, growing a business, or, let’s be real, getting a ton of cash for your business. Bringing in partners of any kind isn’t necessarily always the right answer, though. It’s important to weigh a variety of factors before deciding to even pursue the option of giving up equity. Here are a few things to think through when deciding if raising capital is the right decision for your business:
1) Does your business plan necessitate capital? Having more capital always sounds like a good solution but you should have a solid understanding of what you would use the capital for and that is clearly aligns with your business plan. Don’t have a business plan? You should write one and there is no shortage of free resources to help you, like this one from the Small Business Administration: https://www.sba.gov/business-guide/plan-your-business/write-your-business-plan
2) Do you need expertise in a certain area? Maybe you started your shoe business, which has been a passion for many years and now it’s growing but with the rise of e-commerce, you really need to shift and be more present in that space. There are experts that focus solely on this space and it may be advantageous to bring on a partner that can supercharge your presence there. Of course, make sure that’s the expertise you need and there isn’t a better/less costly way to outsource it. This is simply an example of why it might make sense to bring in a partner other than for the capital.
3) After you’ve created your business plan and know what needs there are, you may find that there are large capital expenditures that need to take place. A physical warehouse/building, etc. or large types of machines that are expensive. Of course, debt financing is always an option so consider alternatives but bottom line is that large capital expenditures could be a need and investors may be the best way to help support that need.
Considering the Drawbacks of Giving up Equity
As with any large decision, alternatives and downsides should be seriously considered. Here are a few of the potential drawbacks of utilizing capital investors.
1) The most obvious drawback is the lack of equity you and any existing partners will retain by choosing other equity partners. If you are used to owning 100% of the business and getting 100% of the profits (or losses), be ready to share by whatever percentage you’re giving up.
2) Aside from the physical returns you’re giving up from the business when it’s in the black, you are also giving up potential control of the business. This is often the more mentally and emotionally draining issue than simply the potential profits. Depending on how your business is structured and how your legal docs read (Operating Agreements, Bylaws, Articles of Organization and/or Articles of Incorporation), there are certain processes and depending on what those are, you may not be in the majority and/or you may not be able to have autonomy as you once did.
3) I just mentioned the lack of control but another ancillary result of that is complicating the decision-making process. If your legal docs state that certain decisions can only be made upon a majority vote or a unanimous vote, be prepared for some heated discussions in the board room, leading to possibly contentious work environments. Of course, I believe respectful arguments are a strength of business leadership but keep in mind it could slow the decision making or bring it to a complete halt.
4) If it’s not already clear from the bulleted points above, your partners are basically your spouses and you should think of it like that. You are married to them for a long time unless you can come to an agreement on a buy out if things go south. Don’t take this decision lightly and know that it isn’t just career altering; it is life altering. Treat it as such.
So, if there are so many drawbacks, what other options are out there?
There are other options but keep in mind they may or may not be as attractive depending on your specific situation. Traditional lending via banks, credit unions, and the small business administration do exist. It can be really challenging to be approved and interest rates may be higher than ideal but it’s definitely something to explore. Additionally, you can consider private debt financing through friends/family or other colleagues. This can be just as stressful as giving up equity but may make sense if you want to maintain control and/or don’t need long term financing/expertise.
Where to Start your Funding Search
There are endless ways to pursue equity financing but here are a few ideas to get you started in exploring:
1) Friends and family (keep in mind this can and sometimes does ruin relationships so always have legal contracts in place and be sure you can and are willing to work with friends/family).
2) Explore your network and/or previous colleagues. LinkedIn makes it increasingly easier to connect with others and to see if they might be interested in something like investing in your business. You shouldn’t just think within the confines of your own personal network but friends or friends and colleagues that aren’t directly connected could be great alternatives too.
3) Most people have heard of the concept “Crowdfunding” and more specifically have heard of platforms like Kickstarter (thanks to “Shark Tank”). There are many crowdfunding platforms, Angellist, Seedinvest among others. Colleges and Universities have even started their own proprietary platforms for students and/or alumni to use. For those that don’t know, these platforms are a way to get your company out there and get contributions/donations and even test products if you’re going to actually sell a product.
4) A pretty neat phenomenon happening over the last decade is the increase in “Accelerators” across the country. Accelerators can be structured in a variety of ways but they are essentially a location (physical or virtual) where start-ups can join a community that typically offers resources, sometimes discounted rent, opportunities for collaboration and possible introduction to local or national Venture Capital firms. Incubators are also a common term that has a similar offering. Incubators are typically for the formation of business startup versus accelerators which “accelerate” an existing business.
5) Last is Venture Capital firms. I won’t spend a lot of time on these because there are so few companies that can get into a room with a VC firm but basically these are the big guys that have significant amounts of cash. If you’re able to get in front of them, nice work and good luck!
There are many things to consider when deciding whether to take on equity partners and it’s not a decision that should be taken lightly. Hopefully this post can give you a rough framework to start with as you explore opportunities for capital investment.
As always, Minerva Wealth Planning does not intend any of these blog posts to be individual advice. Always consult with your financial professional, tax professional, and attorney when making any decisions. Need a financial professional? Contact us at firstname.lastname@example.org or visit our website to schedule a free consultation.