In our last blog piece we talked about what investors look for in a business. While every business needs access to capital to succeed, there are many methods of raising it. Before your company invites investors into your business, you should consider the drawbacks of selling to an investor. As with every decision, there are pros and cons to consider, so we will discuss those in this blog.
Control vs. Investment
Involving investors can be a difficult decision for some companies to make. There are financial and non-financial aspects to consider. The capital involved can make it easier for company management to realize its goals faster, but it will also mean giving up control over a portion of the business and respecting the priorities and demands of the investor.
Pros of Involving Investors
The main advantages of involving an investor are money and experience. A significant monetary investment can fuel rapid growth and allow a company to scale up quickly, making it more competitive and more profitable. Those additional profits can be reinvested in meeting other company goals, creating a virtuous cycle of growth and profitability.
Investment, as an outside source of money, will not have an impact on the company’s cash flow either. It can be used to fund specific projects instead of keeping the company afloat.
An investor’s expertise and network connections can be just as valuable, especially in the long term. Many investors have access to resources that small to mid-sized companies do not have. They may be able to advise you on how to better meet goals and open doors to make those goals happen more quickly. Since they have a personal and permanent stake in the company with their investment, they will have a good incentive to help it succeed.
Drawbacks of Selling to an Investor
An investor is a person or organization that provides funding to a business in return for a percentage of that business’s value. The owner may want to increase the company’s growth, but he will likely have other goals, some of them non-tangible. The investor, however, will want to see a return on his investment.
Essentially by selling to an investor, the owner will have a boss to please. For people who go into business because they don’t want to have a boss, seeking out investors may not be the best option to raise money. How well owners and investors will get along will depend on their personalities and management philosophies.
There are other problems with investors. If owners involve friends and family members as investors, any issues with the company’s growth and profitability can result in harm to those relationships too. The investor receives a share of the business in perpetuity. That can be a long time to share leadership decisions with someone whose goals and viewpoints with which you may not agree.
Investors must be paid, and they often have high expectations of how and when they will be paid. If the owner decides to sell or transition the company, all of those investors will need to receive a payout based on their stake in the company.
Also, if a company involves too many investors, it can lose the majority of the business and, along with it, the right to manage it at all. This may seem like a dire scenario, but it’s just a part of the control aspect of investment. The more investors your company has, the less control it has over its management.
This is why it’s vital for any company considering involving investors to carefully consider both the amount of equity they are willing to sell and the characteristics of the investors themselves. An investor is a business partner. The right partner can be an enormous asset, not just in terms of money, but in terms of the strengths they bring to the partnership. Involving the wrong partner can be disastrous both for the company and the owner.
If you have questions about raising capital, either through financing or investors, Prometis Partners can help. Yes, there are drawbacks of selling to an investor, but there are also advantages. Many factors will influence the right decision. We would be happy to talk to you about your company’s goals and needs and offer suggestions about appropriate strategies you can take to meet them.