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Getting investors on board
Make sure you’re ready, and willing, for investors to fund your business. Securing investment capital is one of the best ways to help you grow your business.
But getting investors isn’t for everyone. It takes forward planning and careful consideration. It involves proving your worth to potential investors — and having the data to back it up.
Is it right for you?
Investment capital is best for:
- businesses willing to give up some equity
- companies in the early stages of business that need funding to bring a product or service to market
- existing businesses looking to grow.
If your business isn’t performing well or is just an idea, you won’t likely find any investors.
A financial advisor can help you decide whether getting investment is right for your business.
InvestEd is a free learning resource offered by NZTE, designed for businesses looking to raise capital.
InvestEd(external link) — NZTE
Seek investment money if you want to grow — not if you need a bailout.
Types of investors
Angel investors look in particular for a person or team they believe in. They usually get involved just beyond the start-up phase, when capital is needed to develop and commercialise products and services that have been validated.
You’re more likely to get backing from venture capitalists if your business:
- is already generating revenue
- has a proven commercial model
- is looking to scale up sales or manufacturing efforts.
They often invest large amounts of money, are more hands-on and expect more control and ownership in exchange for their funding and expertise.
Pros and cons of investors
Even if your business model is ripe for investors, weigh up the potential benefits and drawbacks.
Investor benefits
The benefits include:
- Large amounts of capital that banks won’t necessarily lend to you.
- Expertise — it’s common for investors to become business mentors or board members.
- Access to new networks and markets.
- A committed partner who wants to see you succeed.
Investor negatives
Investment capital also comes with negatives such as:
- Loss of control — depending on what sort of agreement you have with your investor, you are essentially relinquishing a percentage of your business or returns.
- Being forced to sell — investors make most of their money when you sell your business. They might push you to exit, even if you don’t want to.
- Time out from running your business — it takes time and effort to build relationships with potential investors and pitch for capital.
Case study
Picking the right people
After doing extensive market research and validating their accounting software idea, Carlos Chambers and his team at Common Ledger set out to find investors to raise capital to build their product.
“We got on the phone and rang anyone we could think of who might be interested in this opportunity and tried to build a lot of hype and awareness. We also really tried to build an audience so every person we met with, we added to our investor update list,” says Chambers.
After six months of contacting and updating potential investors, the team’s hard work paid off.
“People wanted to talk and invest. That gave us choice, and choice is a good thing when you’re a small business because it’s not something you typically have.”
Chambers then put some criteria in place. “We thought carefully about the investors who had shown interest and who were really going to accelerate the business and add value.”
Common Ledger ultimately got the most capital from private high-net individuals.
Plan ahead
Successfully pitching for equity capital takes time and strategic planning. Many businesses put a plan in place years before they actively seek investment.
Most investors are putting their own capital on the line — so they’ll want proof their involvement will be treated seriously and their contributions will eventually pay off.
Plan ahead so you can show potential investors a history of solid financial performance, or a strong business model and promise to grow.
An accountant or financial advisor can help you put an investment plan in place.
Many businesses begin planning for investment two to five years before they make any formal pitches.
What investors look for
It's important to clearly demonstrate how any capital will be used to grow and yield good returns.
Potential investors will also want to see:
- you have invested in your business yourself
- you are a good leader, with a track record for success
- a robust and capable team around you
- sound projections and cash flow forecasts
- a history of strong profit and loss statements
- a solid business plan
- a proven business model
- a unique selling point or intellectual property
- potential for high-growth
- good governance
- a well thought-out exit strategy.
In addition to the projected return, investors will also want to know what role they’ll play in your business.
An advisor can help you see if you are ready for investors and help you prepare to pitch.
Get to know potential investors
Do your homework on any potential investors before you accept their offer.
This will be the start of a long-term business relationship, so don’t rush into anything and choose wisely.
Remember investors will want to be more involved than those who provide other sources of funding, so get a sense of their motivations and experience. It might pay to get references from people they’ve done business with.
It’s also important to get clear on what they expect in return before you commit to any offers.
How to find investors
There are a number of ways you can find potential investors. They include:
- tapping into your personal networks
- speaking to your local chamber of commerce or Regional Business Partner
- approaching business angel networks that connect entrepreneurs with angels and private business investors. There are several networks in different regions of New Zealand.
It's a good idea to speak to a financial advisor and your Regional Business Partner Network for support.
Common mistakes
Avoid these common mistakes when you get investors on board:
- Not planning ahead — securing investment capital takes forward thinking.
- Approaching investors too early or too late in your business lifecycle — there is an optimal time to pitch for investment capital.
- Not checking up on your investors — get references and check the expertise they can bring to your company.
- Seeking investment because you need to be bailed out or don't want to spend your own money on your business.
