Investor funding is one of the primary ways that entrepreneurs generate the capital necessary to start or grow their businesses. Investors come on board and offer their resources and expertise in exchange for a share in the equity of the business, which typically entitles them to some level of input on how the business is run and a proportionate share in the profits of the business down the line.
How do businesses find investors?
There are many options available to businesses looking for investors:
- Startup platforms: in recent times, companies have launched platforms that provide information, research and assistance to entrepreneurs in both running and funding their business ventures. This includes companies like www.startups.co and www.gust.com, which both provide online communities to assist entrepreneurs in connecting with investors.
- Angel investors: there are many companies who specialise in providing funding to startups. These come in the form of angel investment firms, associations and networks, such as the Australian Investment Network (www.australianinvestmentnetwork.com) or the Business Angels register (www.businessangels.com.au).
- Startup incubators: incubators offer startups a physical space where they can collaborate with other startups and gain access to many successful entrepreneurs and business mentors. These spaces are also a fantastic place for startup founders to meet and build relationships with potential investors.
- Private equity firms: these are the companies who traditionally funded new business ventures and who continue to provide funding to startups with strong growth potential.
- Friends and family: while taking investments from those close to you may lead to problems, it is undeniable that many entrepreneurs get their start this way. It is vital that entrepreneurs taking investments from family and friends do so in the proper way and ensure that a lawyer and accountant have reviewed all contracts prior to signing.
- Crowdfunding: this type of fund-raising differs from the others, as it does not require a business gives up their equity. Crowdfunding typically offers products and services before they have been developed, along with special rewards for higher ‘investments’. The crowdfunders do not see a share in the business profits at any point.
What other options are available to businesses seeking funding?
If a business struggles to find investors, or doesn’t want to give up control over their business and a part of its ownership, there are two other ways to raise capital:
- Business loans: seeking a loan from a financial institution or other organisation has some significant advantages over investor funding. Firstly, it is typically less time intensive to secure and requires less persuasion and showmanship. Most loans only require financial statements, balance sheets, forecasts and a business plan, whereas investors need a compelling presentation that convinces them of the potential payoff down the line. The drawback is that the loan accrues interest and requires regular repayments, and these repayments are still due even if the business fails.
- Government grants: seeking a grant is one of the best ways for a new business to acquire the capital it needs, without giving up autonomy or taking on the risk of a loan. Government grants are given without expectation or repayment or profit-sharing, and often come with significant mentoring and support. The downside is that applying for these grants can be time consuming and difficult and the waiting times to find out if the application has been successful can be long. In addition, grants are often very competitive.