If you’re looking to grow your business, external finance could be the catalyst you need. Quite often, turning a homegrown idea into a value-driven entity requires funding.
But selling a stake in a business you’ve built up can be emotional, stressful and challenging. So how do you know if you’re ready?
You’ll need to ask yourself some difficult questions, like the ones we’ve set out below.
Which types of finance are right for me?
Finding the right finance can be a long, hard slog.
Potential investors may critique and analyse you. You might have to stretch your resources while you’re fundraising.
And selling part of your business – which may also involve stripping back control – can be daunting.
But the rewards can be significant. Knowing what funding options are available and which one you should go for will help you prepare.
Types of equity finance include:
Each brings different benefits and risks, and requires different levels of commitment from you and your potential investor.
For Equity Crowdfunding, for example, be prepared to share certain information about your business publicly.
With Angel Investment, you may need to be able to work closely with an individual on a growth plan.
Each type of finance has its own advantages and disadvantages, so it’s important to understand them.
With a full knowledge of your options, you can see which one appeals most (even if just in theory), when you’re weighing up equity investment.
Do I have a clear plan?
Sourcing finance could place a heavy burden on your money and your time, so be prepared.
Have a clear picture of your business’s finances. Arm yourself with a detailed understanding of how your business might grow and where the value lies.
Be honest about how much equity you want to sell. Many advisers suggest that if you’re just starting out, you should consider selling 10%–20%.
As this decision is a personal one, ultimately the figure will fall between what you’re comfortable with and what your investor needs to make their investment worthwhile.
Knowing the amount of finance you need may also help you find the right investor later, and demonstrate how they’ll receive a return on their investment.
Think about your timeline. How long do you have to find finance? Set yourself a deadline so you’re less likely to waste valuable time.
Am I ready for the emotional challenge?
The search for finance could not only challenge your resources, it may be emotionally intense too. Consequently, you should be prepared to deal with setbacks.
Finding finance can involve lots of meetings and pitches. Investors may question and critique you, and you’re likely to face rejection at some point.
Added to that, the process can often be public, and a “no” from one investor can create a domino effect.
You need to be mentally prepared for the journey. Ask yourself if you’re ready to deal with these obstacles and keep your long-term goals in mind.
Am I prepared to dilute control of my business?
The funding process may only part of the story.
Once you’ve secured investment, you need to be ready for the possibility of sharing responsibility for your business – which might be a first for you.
Diluting control of your business can be a scary prospect. Your opinion may no longer be final, so you must be comfortable with that.
Relationships with investors are often long-standing, and you’ll need to work together to foster growth.
Angel Investors, for example, often take a hands-on approach to all businesses in which they invest.
Be prepared to spend time with investors on a daily basis. They may be able to help you overcome challenges and achieve the growth you’re driving towards.
Do I have what it takes if things really take off?
You’ve been through the tough process, you’ve secured investment and you’re watching your business grow. But are you really ready for the boom?
Your investor will be looking for returns, so you may need to have difficult business conversations. You must stay sufficiently ambitious so it motivates them to continue helping your business develop.
Another point to consider is that a growing business may need to change.
As a business owner, it can be difficult to move from a smaller business and a culture you’ve created to something bigger or different.
Think about whether you’re happy for that culture to change.
Selling a stake in your business usually requires commitment and preparation. But the results can be worth it. Are you ready?