Depending where they are in their startup phase, new businesses often get several types of investment funding. Though some entrepreneurs can bootstrap, that is fund themselves from savings and continue growing out of first revenues; many need outside sources of capital to hit the ground with products and services ready for market.
Here is an overview of what you might encounter when it comes to partners, investors, and funding stages.
Do You Need an Investor or Partner?
Both partners and investors provide working capital that enable you to pay your employees, suppliers, business taxes, and even yourself. While investors typically provide an infusion of funds in exchange for a future return or ownership share, a partner often offers skills, experience, and know-how to help grow the business.
Whether you require an investor or partner depends on your business needs and goals.
Pursue an investor if you intend to:
- Purchase a new business facility.
- Purchase new equipment.
- Build or launch new services or products.
- Commence a new marketing campaign.
- Pay down or settle high-interest debt.
Enlist a partner if you intend to:
- Acquire access to capital.
- Need complementary skills, expertise or knowledge.
- Gain new customers and contacts.
- Pursue new target markets.
- Build in-house business functions.
Overall, if you want to maintain control of your business and only need funding, look for lenders or investors. If you are looking for someone to share the responsibilities of running the business and need the help of human capital, then choose a partner.
Investments Based on the Stage of Your Company
Your company has several stages in its funding cycle. Every company may not go through all these stages, but you should understand who funds businesses at various stages of growth. The amount of money you need and the people who can provide it may change as your business transitions from one stage to the next.
Idea stage. You are the one involved at this stage, just you, your idea, your finances, and a dream.
Co-Founder stage. Getting it up and running often takes some help in the form of a co-founder. Their enthusiasm, skills, contacts — and maybe even cash — can help get you on a more solid foundation. Because you have nothing of substantive value yet, this person is taking a risk. To compensate for this, you may give them equity.
Family and friends stage. Before you get a working product to show real investors, you might very well run out of money. One option is to turn to your parents, siblings, relatives, and friends who might invest what they can afford. Hopefully, it is enough to keep working on your prototype.
Angel stage. As time passes, you may have exhausted money received from family and friends, yet you are still not ready for market. Your next step may be to look for an angel investor to put in a more substantial investment. You might also get accepted into a startup incubator or accelerator program. These types of programs can provide you with working space, advice, and possibly even some money.
Venture capital stage. By this time, you have a working model of your product and can attract the attention of a venture capital group. This stage might have several levels of investment that occur over time, with either the same or different venture capitalists adding additional funds at the next level.
IPO stage. At this point, you are a real working company. You decide to go public to let your early employees, and you, cash in on the success of your business and the stock they’ve been holding. It can also give your company a significant injection of funding to make a major push in marketing, research, and manufacturing.
Things To Look for in An Investor
If you’ve decided to accept outside investment, make sure the people you are getting money from are a good fit for the long-term financial health and growth of your business.
Here are five points to consider when working with venture capitalists and angels.
- Look into their background. Investors will check you and your company out thoroughly. Do the same with them. You want no surprises. Ask other startups that they are working with if they are good communicators. Are they reasonable and intelligent? Are they stable and courteous?
- Competition is good. Let them know that other investors are strongly considering investing in your startup. Much like a resume, a little creativity is helpful. Negotiate to get the best deal.
- Don’t be emotional. Yes, it is your dream. However, you are talking money now, so detachment and pragmatism are the watchwords.
- Understand everything. Ask questions. Have a lawyer and an accountant look over everything. Read each word before you sign.
- Get your own lawyer. Moreover, particularly one who has experience with startups. You need someone on your side who can not only explain the deal terms and conditions to you, but negotiate terms to make them more favorable to you and your business.
The bottom line: funding is out there, but it often comes with strings attached. Make sure being attached to those strings is something with which you are comfortable.