External investors will probably want a share of your business in return for capital (equity finance). The person or business giving you money for your business is prepared to take a bigger risk for a bigger potential return. They are prepared to risk losing their capital if your business fails.
You need to weigh the advantages of an investor – money, a vested interest in the success of your business, skills, contacts and experience – against the need to share control of your business.
If you don’t want to share ownership and control of your business there is little point in approaching investors. Many New Zealand business owners don’t like the idea of losing control of their business idea, so won’t trade off new funds (and business growth) for control.
Some New Zealand small businesses tend to be self-reliant, like control, find it difficult to delegate, dislike debt and confuse ownership with management control. As a result their chances of getting equity finance, which usually requires some trade off between ownership and money, are remote.
You need to consider what you really want. Is it:
- wealth
- personal growth
- career satisfaction
- control
- eventual exit?
You probably can’t have all of these, so what are you prepared to give up? Ultimately control is expendable, the others are not.
Other factors inhibiting outside investment include:
- a reluctance to share secrets. Businesses controlled by very independent founders reluctant to share their ideas, requires trust and a certain amount of confidentiality
- businesses lack of awareness about how to get their business ready for investment. Investors are interested in the business not just the product.
- high fees. The cost structure associated with venture capital can be prohibitive for many small businesses. However, any business serious about raising capital must be prepared to learn about getting their business investment ready by reading, attending fully funded Escalator workshops and seeking professional advice.
- approaching the wrong investors. Your chance of success will increase if you approach the right kind of investor for your stage of development.
Due to the high investment risk and high cost of researching proposals most venture capitalists and angel investors are often not interested in deals under $500,000. However, some organisations are interested in smaller deals of around $150,000 - $1,000,000.
For capital rounds of less than $100,000 it’s best to approach your friends, family or bank as most professional investors will not be interested due to the cost of vetting the deal.
If you want capital from investors you must be prepared for your business to come under intense scrutiny and to give up some control. But remain focused on your long-term goals and consider what you are prepared to give up to help you achieve them. Although getting outside investment can be complex, requiring good business practices, a clear strategy, a business plan, and documented business systems, the rewards can be outstanding.
