Should You Take on Investors? Questions to Answer Before Speaking with Investors

Key Considerations for Evaluating Investor Funding

Understanding Investor Funding

Investor funding involves receiving capital from investors in exchange for debt or equity in your business. Investors can be individuals like angel investors, venture capital firms, or other entities looking to grow businesses with high potential. While this form of funding provides substantial capital for growth and connects you with experienced investors who offer valuable mentorship and networking opportunities, it also comes with significant considerations.

A lot of business owners are inundated with headlines of other businesses receiving huge investments from venture capital firms and celebrities. The reality is that taking investment is not the best choice for every business. HighPath strives to support businesses not only achieve their funding goals but be satisfied with their funding partner’s long term. The best way to have a successful relationship with your funders, whether they are investors, banks, or private lenders, is to ensure both parties are aligned on the goals of the business. Below is a set of questions we encourage business owners to go through for themselves before deciding to proceed with investment as a funding option.

Benefits of Investor Funding

A. Substantial Capital for Growth: Investor funding provides the capital necessary to scale your business rapidly, enabling you to achieve milestones that would be difficult to reach with other forms of funding.

B. Mentorship and Networking: Investors often bring a wealth of experience and industry connections, offering valuable guidance and opening doors to potential partnerships and opportunities.

Questions for Business Owners to Ask Themselves

Below are just a few questions that a business should discuss internally when deciding if investment is the right choice to achieve the business’s goals. We encourage you to add your own questions based off the preferences and experience of the business owners.

1. Can my business achieve its goals without investment capital?

When considering whether to seek investor capital, business owners should evaluate the feasibility of achieving their objectives. Can your business realistically achieve its objectives without investor funds? While funding might be necessary, explore alternatives such as bank loans or private lenders. Ensure these sources can sufficiently support your budget and growth plans.

2. Does my liquidity timeline match with my investors?

Can you reach your business goals within your desired timeframe without investment? Investor funding often acts as a catalyst for accelerated growth. Consult experts in your industry to validate that your objectives, plan, and timeline align with your funding strategy. Investors typically have specific timelines for profit returns and may pressure you to align your business strategies with their expectations. This can add stress and impact how your operate your business.

Venture capital firms typically expect to receive a return in 7-10 years. The timeline expectations for various types of investors (angels, institutions, private equity, etc…) vary so be sure to inquire with potential funders.

3. How fast and how much can I scale the business?

A critical piece to knowing if taking investor capital is right for you is knowing how fast and how big the business owners want to build. Venture capitalists and professional investors look for businesses that have a plan to grow into a huge enterprise at a rapid scale. One rule of thumb is that venture capital funds want to see you grow from $1m in annual revenue to $100m in annual revenue in 7-8 years. As if that is not difficult enough, the expectation then is either to keep growing at the same pace or look for an opportunity to provide liquidity to shareholders in the form of a sale or IPO. These expectations drive business decisions in a way that may or may not align with your vision for your business.

Now, let’s say you do want to scale your business rapidly and take on investor funding to do so, the next question is whether your vision can feasibly support that growth trajectory. Does your revenue model, cost structure, market size, and distribution plan all support a rapid growth strategy?

4. How long do I want to work on this business?

Remember that building a business is a marathon. Whether you take investment funding or not, your commitment will be years-long. This may lead to a lifelong commitment or vision to make a family-run enterprise or a plan to build the business to a break-even point and then sell it. Either way, knowing your desired time horizon for leaving the business will dictate the type of funding plan and growth trajectory.

5. Do I want to give up equity in my business?

Starting and building a business is an incredibly personal and intense experience. Many business owners get too caught up in the idea of going faster they forget the trade off to taking on investment is giving up shares in your business. The impact of that decision is that you are no longer the sole decision maker as the owner. For many business owners, being your own boss is one of the most important aspects of the opportunity. Having investors may decrease your risk, but it also decreases your decision-making freedom.

Tips to answering these questions

· Be brutally honest with yourself, and don’t think about what potential funders or your co-founders will think about that answer.

· Take the time to answer these questions with openness and thoughtful review – it is easy to rush through them, but writing down or discussing your thinking with trusted colleagues is valuable.

· Study businesses you admire and learn their story – how did their path unfold, and does it align with what you want to build?

· Try to speak with someone who is a market expert in your domain – try to gauge how they think of the scale and state of the market, and relate that to your plan.

The content of this article is provided for general information purposes only. It is not intended to amount to advice on which you should rely. You should obtain more specific or professional advice before taking, or refraining from, any action or inaction based on this article.  Although we make reasonable efforts to update the information, we make no representations, warranties, or guarantees, whether express or implied, that the content is accurate, complete, or up to date.  To the extent you engage HighPath, the contents of this article shall not constitute any express or implied term, representation, warranty, guarantee, or other obligation of HighPath.