Why investors seek small business owners to invest in and the risks you’ll face
If you’ve ever watched Shark Tank, you may think this is how investors operate. While investors are great when looking to fund your small business, typically, it’s difficult to maintain control over the future direction of your business.
Investors buy ownership equity; therefore they’ll take a percentage of all future earnings. This could be quite a lot of money if the business continues to grow.
Types of Business Investors:
-Real Angel Investor-
An angel investor typically comes from among an entrepreneur’s family and friends. Angel investors may provide a one-time investment to help a business excel, or provide ongoing installments to support and carry the company through its start-up phase. This type of investor usually has connections or experience to help the company grow. Funds could start as equity, but convert to debt as cash flow increases.
Angel groups are “groups of angel investors who regularly convene as a group, usually in-person, to evaluate and invest in startups.” Angel groups often focus on certain geographic regions, or an industry target. Members typically are high net-worth individuals who wish to remain anonymous and will work through an agent to find a business that match their profile.
Unlike angel investors who invest personal funds into potentially rewarding business opportunities, venture capitalists invest other people’s money by way of firms and companies. These companies often take ownership stake in the small businesses they invest in, while offering expertise to help the business grow.
Pros of using an investor to fund your business:
- You create potential for true partners with industry experience and connections
- Patient capital could allow time for business to develop and grow before the returns are paid out,
- Equity investment could lead to greater access to capital as risk is spread to other parties.
Cons of using an investor to fund your business:
- When working with an investor, you’ll be giving up some control and the right to some portion of your future earnings
- Early stage equity could be much more valuable later as the business grows (and you may wish you still had full ownership),
- If business fails, it may be difficult to attract investor or VC capital in the future.
Before you dive into the world of venture capital, read our “Rethinking Debt Capital in a VC World” article. Remember you don’t have to win Shark Tank to be a successful entrepreneur. Click here to return to the “4 Sources of Business Funding” article.