Ensure that you are prepared and open to the idea of having investors fund your business. Acquiring investment capital can be one of the most effective ways to expand your business.
However, seeking investors isn’t for everyone. It requires proactive planning and thoughtful evaluation, along with the ability to demonstrate your value to potential investors using solid data.
Is it right for you?
Investment capital is most suitable for:
- Businesses that are willing to trade some equity in exchange for funding.
- Companies in the initial stages of their business journey, seeking financial support to launch a product or service in the market.
- Established businesses aiming to expand their operations.
If your business is not performing well or is still at the idea stage, it’s unlikely that you’ll be able to attract investors.
A financial advisor can help you determine if seeking investment is a suitable option for your business.
NZTE provides InvestEd, a complimentary educational resource for businesses seeking to secure capital.
InvestEd — NZTE
Tips on choosing types of funding
Tip
If you aim to foster growth, consider pursuing investment capital, but refrain from seeking it solely as a bailout solution.
Types of investors
Angel investors, especially, seek individuals or teams in whom they have faith. Typically, they become involved during the early stages of a venture when capital is required to refine and bring validated products and services to the market.
When it comes to securing support from venture capitalists, your business is more likely to be backed if:
- It is already generating revenue.
- It has a proven commercial model.
- It aims to expand sales or manufacturing operations.
Venture capitalists often invest significant sums, take a more involved role, and anticipate greater control and ownership in return for their funding and expertise.
Pros and cons of investors
Even if your business model is attractive to potential investors, it’s essential to carefully consider the potential advantages and disadvantages.
Investor benefits
The benefits include:
- Access to substantial capital that may not be readily available from banks.
- Expertise and guidance, as investors often take on roles as business mentors or board members.
- Opportunities to tap into new networks and markets.
- A dedicated partner who shares your commitment to achieving success.
Investor negatives
Investment capital can also present some downsides, including:
- Loss of control, as you may need to give up a portion of your business or profits depending on the terms of your agreement with the investor.
- Pressure to sell, as investors typically profit when you sell your business and may urge you to exit even if you would prefer to keep running it.
- Distraction from running your business, as seeking out potential investors and pitching for capital requires time and effort that could otherwise be spent on day-to-day operations.
Case study
Picking the right people
Following extensive market research and validating their accounting software idea, Carlos Chambers and his team at Common Ledger embarked on a mission to secure investors and raise capital for product development.
“We got on the phone and rang anyone we could think of who might be interested in this opportunity and tried to build a lot of hype and awareness. We also really tried to build an audience so every person we met with, we added to our investor update list,” says Chambers.
After six months of dedicated communication and updates with potential investors, the team’s hard work yielded results.
“People wanted to talk and invest. That gave us choice, and choice is a good thing when you’re a small business because it’s not something you typically have.”
Chambers then established specific criteria for selecting investors. “We thought carefully about the investors who had shown interest and who were really going to accelerate the business and add value.”
In the end, Common Ledger secured the majority of its capital from private high-net-worth individuals.
Plan ahead
Securing equity capital through a successful pitch requires careful planning and time investment. Many businesses develop a plan years in advance before actively seeking investment.
Since investors are risking their own capital, they expect assurance that their involvement will be taken seriously and will yield returns in the future.
It is crucial to plan ahead and demonstrate a track record of strong financial performance or a robust business model with growth potential when approaching potential investors.
To establish an investment plan, it is advisable to seek assistance from an accountant or financial advisor.
Fact
A lot of businesses start preparing for investment two to five years prior to presenting formal pitches.
What investors look for
Potential investors are looking for businesses that can demonstrate how capital will be used to grow and generate good returns.
They will also seek evidence of:
- Your personal investment in the business.
- Your capabilities as a competent leader with a track record of accomplishments.
- A skilled and capable team supports you.
- Reliable projections and cash flow forecasts.
- Strong profit and loss statements from previous periods.
- A well-developed business plan.
- A proven business model.
- Unique selling points or intellectual property.
- Potential for high growth.
- Good governance practices.
- A well-thought-out exit strategy.
Apart from understanding the anticipated returns, investors will also want clarity on their role within your business.
An advisor can help you determine if you’re ready for investment and assist you in preparing for your pitch.
Get to know potential investors
Before accepting an offer from potential investors, it’s crucial to do your research and due diligence.
Remember that this is the beginning of a long-term business relationship, so take your time and choose wisely. Keep in mind that investors tend to be more involved than other sources of funding, so it’s important to understand their motivations and level of experience. It may be helpful to ask for references from people they’ve done business with.
Before committing to any offers, make sure to clarify what they expect in return.
How to find investors
There are several ways to search for potential investors, including:
- Reaching out to your personal network
- Consulting with your local chamber of commerce or Regional Business Partner
- Contacting business angel networks that connect entrepreneurs with private business investors and angels. There are multiple networks in various regions of New Zealand.
Getting assistance from a financial advisor and the Regional Business Partner Network can also be beneficial.
Regional Business Partner Network
Common mistakes
Steer clear of these common mistakes when bringing investors on board:
- Failing to plan ahead – Acquiring investment capital requires forward thinking and strategic preparation.
- Approaching investors either too early or too late in your business lifecycle – Timing is crucial when pitching for investment capital.
- Neglecting to conduct due diligence on your investors – Obtain references and assess the expertise they can contribute to your company.
- Seeking investment as a bailout or to avoid personal investment in your business – Investors should not be seen as a means of rescue or a replacement for personal financial commitment to your venture.
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