The Small Business Owner’s Guide to Working with Investors

Posted by Factor Funding Co. on May 5, 2016

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Starting a small business is exciting and carries many benefits. Working for yourself means you can do what you are passionate about, hire employees you trust, and see your own ideas come to fruition. However, no one operates a business alone. To be successful, you need the right investors.

If you have never dealt with investors before, it can feel overwhelming, but it doesn’t have to be. You can approach investors with confidence and obtain what you need. Furthermore, good relationships with investors will ensure your business stays viable throughout its first few years and grows for many years into the future.

Determine Which Investors You Need

Not all investors are equal; certain investors are best for certain businesses. Look at your business plan, prospective budget, and other pertinent documents to determine your specific financial needs. This will help you communicate exactly what investors will be risking and what they stand to gain if they come on board with your business. If your business comes with many financial risks, be prepared to explain why they are necessary and how you will ensure positive outcomes.

Additionally, determine how much control you want. Depending on your financial needs and the amount investors will put into the business, they may seek some control over your management practices, the products or services you sell, and many other factors. If you find this difficult, you’ll want to seek an investor who is willing to let you manage your own affairs. If, however, a prospective investor is a business expert, you may want the benefit of his or her management skills.

Decide How to Attract Investors

Every business has certain elements that will attract different investors. When choosing your core investment group, ask yourself why you are considering a certain person or company and what will attract that investor. Often, investors are attracted to certain business forms, such as a partnership or a limited liability company. Before you launch your startup, think carefully about the form you’ll use and why.

After choosing your business form, decide which benefits to offer investors. If you are a corporation, for example, you may be able to offer voting shares. If you are a partnership, you can offer a certain financial share in the business or control over certain areas. For example, you and a financial partner might decide to work in the same counseling clinic. Your partner could decide how much to charge clients and how to handle billing. You might also give him or her some say in what counseling services are offered.

Think Beyond Financials

No matter how small your startup is or how much money you need, you can and should choose your investors wisely. It’s okay to turn one down if you know he or she isn’t right for you. In fact, that kind of proactive thinking is advisable.

Be prepared to ask questions about how investors support their companies, monetarily and otherwise. Ask prospective investors what they already know about your business and whether you can talk to other chief executive officers that they’ve worked with. If an investor won’t supply references, it’s a red flag. Also, watch out for investors who hedge answers about their experience or don’t show excitement about your company.

Choose investors who will offer your company something besides money – “angel investors” provide startup owners with contacts who are interested in their products, services, or ideas. Additionally, angel investors build rapport with startup owners and work to fulfill their needs. For example, let’s say an angel investor learns your counseling clients are seeking addiction recovery services, which you don’t yet offer. The investor could introduce you to addiction recovery experts in your area, prospective counselors, and prospective rehabilitation facilities with which you may want to partner.

Beware Incompatible Investors

Business experts will tell you to pick an investor as you would a spouse. You want your spouse to be as compatible with you as possible. Watch out for investors who won’t help you strategize or pitch in to solve business-related problems. No matter how much say you give an investor, watch out for one who abuses his or her power (for instance, an investor who forces you to fire a valuable employee, one who constantly tears down your ideas, or who uses his or her money to control factors like employee payroll or basic equipment expenses). If your investor is abusive in any way, don’t be afraid to drop him or her and seek someone else.

Though you should use your intuition when approaching investors, do your research, too. Approach investors who are likely to support your efforts and consider how to best approach them as people, rather than as pocketbooks.

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