Startup Investment Decisions: Key Issues to Understand Before Choosing an Investor

investor

Choosing an investor for your business is arguably the most critical decision an entrepreneur can make. Selecting an investor is much like getting married. Except that you can’t easily get divorced… Most businesses embrace investors for their ability to fuel money into business operations, although investors may bring more than just cash. In some cases, business investors bring headaches, lawsuits and stubborn attitudes.

I have watched many small businesses take off successfully, while others have abruptly failed over the years. Whether the business succeeds or not is often a game of money, opportunity and risks. We all know starting a business often involves large initial costs that can be difficult to manage alone. Add this to location, staff, budgeting and planning and this could become a risky emotional roller-coaster.

What you need to know…..!

Investors are parties who allocate capital for partial equity ownership in your business. They are also a form of financial assistance and can help your business overcome financial obstacles, particularly where loans may not be approved by banks. Offering loans without repayment interest and deadlines like traditional institutional lenders can be extremely useful in easing financial risks and stress. Without an investor, business owners are often left to handle the start-up costs on their own, as well as manage every other aspect to keep the business operating. Once it becomes too overwhelming, a business can begin to fall and possibly fail, becoming a nightmare that could easily be avoided.

One of the primary reasons why many businesses often fail is often due to lack of cash flow or the inability to anticipate sufficient funds in the initial start-up phase. Having an investor can help overcome this problem, as the invested is not necessarily classified as a loan. This means there is no upfront repayments, no deadline and fewer worries. Investors can be prepared to take on more risk than traditional lenders. Where banks can be reluctant to lend based on credit ratings and potential to repay, investors offer a more flexible and rewarding opportunity for financial assistance. Better yet, seeking out silent investors who only invest capital means business owners are still left to run the day-to-day operations as they wish.

However, having investors is NOT necessarily all positives and benefits. They can have high expectations about returns from the business, putting more pressure on owners and the business’ growth. Because they now have partial ownership, their interests may lie on their own returns. This can hinder the decision making process as their primary focus is not so much the success and growth of the business, but their personal investment. Legally documenting every eventuality with a solicitor can alleviate these issues, but this comes with extra costs. Investors come with both pros and cons, but choosing the right one at the right time can take a significant load off the financial risks small businesses.

Don’t assume that all investors are the same, just because their money is always the same color. Every entrepreneur should do the same due diligence on a potential investor that smart investors do on their startups. Check on their track records, values and management style. Taking on an investor is a long-term relationship, like getting married, that has to work at every level ~ Martin Zwilling

Generally business investors come with their pro and coins. Do your research and choose wisely before making final investment decision for your startup!

Good Luck.

~Bri

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