A Breath of Opportunities to Start Your Business
Once you have formed your business you may need to consider investors, initially for your start-up or after some time for additional capital, in order to hit the ground running or continue growing your business. Deciding who should you allow to be an investor is something to be considered carefully before inviting strangers who may be able to control your business, which you have arduously worked and developed for a significant period of time.
Bear in mind that, depending on the number of shares, investors may potentially have more control than you on business decisions and how the company will operate. Therefore, it is very important to choose the right business structure before you invite other stakeholders. Investors look for passionate founders who are willing to give it all and work the extra mile, have demonstrated traction and growth potential, their products have a competitive advantage which are distinct between competitors and their management and executive teams have been built strategically.
There are many ways and sources to raise and/or obtain capital. As a start-up business owner, you do not need to have all the capital saved in your account. Some very successful start-ups started with funds from family and friends or through a regular bank loan. Others chose private investors.
Below, we outline a few sources…
Family and Friends
Family and friends might seem, at first sight, to be the less complicated way to find investors, however, by involving a family member or a friend in your business you risk losing or damaging the relationship, should the business fail. On the other hand, in comparison with a regular bank loan, you may be better able to negotiate a family member’s or friend’s return on their investment. They may agree not to receive interest payments on the investment but only to receive the net amount invested and a share of the business profitability, if any. Nonetheless, when involving family and friends, you should always be honest and explain the risks while setting an expectation on their return. Be sure to pitch your business plan properly in order to be taken seriously.
You may also consider applying for a loan with a regular bank. However, this process may be very arduous if you have no credit or assets to borrow against it, especially if you are a young entrepreneur. Nevertheless, the U.S. Small Business Administration (“SBA”) provides assistance to small businesses in obtaining loans, guaranteed by the SBA, with competitive terms and unique benefits such as lower down payments, flexible overhead requirements, generous repayment terms, lower interest rates, and no collateral for certain loans. The SBA also provides counseling and education which is extremely beneficial for new business owners with little to no experience.
As a general rule, there are two (2) types of private investors: angel investors and venture capitalists, which we will discuss at a high-level below. These types of investors usually receive shares in a company and are more difficult to attain given their market expertise. They also have been quite popular with technology-based start-ups and companies.
These investors tend to be individuals with a high net-worth that not only have capital but also resources as well as information and experience that could assist a company to thrive. Angel investors are very specific on the type of business they invest in and usually have a certain industry they like to sponsor. They may contribute large amounts of capital in order to be the only investor and participate in the development of the business and have an active voice. Note that angel investors may expect a high return on their investment.
These other investors are needed once a business is established and is actually expanding into a riskier venture. Venture capitalists set up funds comprised of a pool of investors. They look for businesses that have: (1) a solid management team; (2) proven to be successful in the marketplace; and (3) a sound business plan to expand. Venture capitalists also tend to invest larger amounts of capital, in comparison with angel investors, and have a higher return on investment expectation. More than likely, they will have a board to oversee portfolio companies and certain control on how the company is managed and run.
If you are starting your own business, you may find it useful to reach out to similar businesses or schools within your field/industry for recommendations or minority investors who may have an interest and/or other useful resources. You may also consider other routes such as crowdfunding platforms, reward-based donations, peer-to-peer lending, equity crowdfunding, as well as many other avenues. Remember, when seeking investors for your business you should always be creative in your thinking and be open to alternatives. But never forget to do your due diligence and know your investor before you decide to include them in your business.
Please note that this blog should be read for informational purposes only. If you have any questions or require additional information, please contact our office. Stay tuned for our next blog on corporate structures, business formation and best practices!
Thank you for reading our blogs!