By Kshitij J. Zaveri
Mention the words “Equity Investors” to any entrepreneur and they will start shifting uncomfortably in their seats. After all, equity investors are perceived as predators that will give you the money, no doubt, but will end up taking over the business and showing you the door at some point in the future.
Is that true? Maybe. Always? No.
Let’s start by taking a look at the investment stages a typical new business may go through. Of course, these may vary depending on the type of business you are in.
Most first time entrepreneurs underestimate the effort it takes to secure equity investments. At the same time, they are wary of the equity stake and management control they would have to give up if they accepted these investments. Let’s take a look at some of the pros and cons of equity investments versus traditional bank financing options.
There are industries that are capital intensive or are classified as ‘risky’ by the banks and it is very difficult, if not impossible, to secure debt financing for these, especially for start-ups. Then there are industries where businesses have an incubation period before they can complete their research and develop a product/service. Sometimes, the entrepreneurs’ personal financials make them ineligible for a loan. Such instances are examples when the entrepreneur might be better off seeking equity investors.
So what do equity investors like to see before they invest in a business? Pose this question to professional investors and it is likely you will get different answers from different groups. This is because every investor has his or her own sweet spot when it comes to the industry, dollar amount, and business life cycle that they will invest in. While shortlisting potential investors, entrepreneurs would do well to take these factors into consideration. A later stage investor that invests between $2 to $5 million per investment in e-commerce companies would like to see something entirely different than what a seed stage Angel group, investing amounts up to $500,000 in brick-and-mortar retail stores, would like to see. Having said that, there are a few things that all investors pay attention to and we feel entrepreneurs would do well to cover these bases, amongst other things.
Seeking equity investors can be a time consuming and frustrating process but the rewards may make it worth the effort. Be persistent, don’t lose focus and above all, do your research. These are exciting times we are living in, with the booming start-up scene and droves of investors setting up shop in the Silicon Alley!
Kshitij J. Zaveri
Business Advisor/Baruch SBDC