When you want to grow your business, you often need money. Maybe you need money to buy new stock, do some marketing, employ new staff, do some more things. The banks are reluctant to lend to you, because your balance sheet is looking a bit weak, or you haven’t got enough money yourself to match their lending. So you want to get some cash from an investor, in return for a share in the business.
An investor is effectively buying equity on the basis that if they give you some cash now, eventually their share of the business will be worth much more. So if someone were to invest, say, 50k in your business, they’ll probably be thinking that they’ll want to get between 75 and 100k back in 3 – 5 years time. A better return for them than putting their money in the bank, especially with today’s laughable interest rates, but much more risky.
Things to ask yourself are:
- Do you want to end up with a smaller slice of a big pie, or a big slice of a tiny pie? My experience is that the business owner always wants to keep as much of the business for themselves as possible, but this isn’t always sensible, as a lack of cash in the business means that you’ll always have a little pie.
- What are the strings attached to the cash? If you’re getting money from friends or family, or from an investor who has previously run a business, there can be the danger that they’ll interfere with how you run the business.
- On Dragons Den, people are always looking for the dragon who can bring contacts, or experience into the business, giving you a boost as well as the cash. In real life, this is pretty rare, so you shouldn’t expect this from an investor.
- If you had 100k to invest in a company, would you invest in your company? What’s the likelihood that they’ll get their money back? What’s the likelihood that you’ll all make millions? Think about it from their point of view.
- How will they get their money back? It’s all very well to own part of a business that’s worth a million, but the investor wants to be able to spend that money in 3 years time. Think carefully about what they’ll eventually get back in terms of hard cash.