The company of strangers: should your business bring in investors?
Identifying when you need investors
There are many reasons for seeking out investors. Unfortunately most businesses will seek out investment funding at a point that it is most critical or for the wrong reasons. Many seek funding for the business when it is in financial distress and gaining investment in that circumstance is always hard. Neediness is never a good starting point for negotiations and few investors will be prepared to take the risk to save you.
- Major investment is required
- The business cannot service its growth or capital requirements and the requirements are greater than what it can fund on its own.
- Debt Investment is paid back in some form and can be structured in many ways, from traditional interest payments to profit sharing.
- Equity Investment is what most people think of when they consider bringing in investors, where there is an injection of capital into the business and that buys equity in the business. This usually means a degree of management participation or control and there are many ways of structuring these kinds of arrangements depending on the motivation of who's involved.
A third type of investment that is gaining increasing ground is crowd funding, where investment is sourced from many, many investors via platforms such as Kickstarter and Indiegogo (https://www.indiegogo.com/) to develop innovative products. These businesses generally start and stay lean, but actively seek input and feedback from the market place whilst the development roadmap unfolds.
Family and friends
Commercial investors
Commercial investors come in many forms – angel investors, venture capitalists, private equity, or investment by associated parties. At the SME end of the market, angel and venture capitalists dominate.
Angel investors tend to operate at investment levels between $100k and $500k. Angels are generally individuals looking to for a great idea from a start up that they can capitalise on.
Private equity investors
Private equity investors are at the other end of the scale and look to invest tens of millions - generally with established businesses reaching for another level and expectations of high growth.
Some things to look out for
- Insufficient formality around the agreement – misunderstandings and boardroom battles over direction take the focus off achieving growth
- The wrong structure at the beginning – a bad deal won't get better
- Exit clauses - look at what the deal looks like at the end of the investment not just at the beginning
- Not being able to fulfil the stated plan - be certain about what you're offering
- What are you giving away? Often business owners are so keen to secure the investment they forget about what they are giving away.
- Control and how much the investor can achieve over time and the influence they have - you don't want to be voted out of your own company once it's successful
- The level of management control and influence exerted - infighting and debates about direction will only take the focus off the big picture
- Arms' length remuneration for existing principals that are seeking the investment and for additional board members.
Bringing investors into your business is not an area you should approach without expert advice. Contact us on 02 9957 4033 for more information or to speak to one of our business professionals.
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Disclaimer
This article is provided for information purposes only and correct at the time of publication. It should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.
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