Understanding the World of Equity Investment

Outside investment is something that many businesses need, but to secure funding, entrepreneurs need to understand the world of investment and how it works.

All entrepreneurs are driven by an ambition to grow their business. But often, those ambitions are held back by a need for more funds. As a result, they often need help to scale the businesses to an appropriate size.?

This is why many entrepreneurs end up seeking investment from outside the business. But what is out there, and how do they access it??

This article takes you through the investment world, how it works, and tips to enhance your chances of securing funding.

Types of investments?

Firstly, entrepreneurs need to understand the investment options open to them. The three main types of equity investment most entrepreneurs consider are;

Angel investors

Angel investors are particularly suited to early-stage businesses where an entrepreneur doesn’t just seek funds but also the expertise and connections they bring with them. Angel investors are usually experienced entrepreneurs looking to help others achieve similar success to theirs – and see a return on that investment.

Venture capital?

Meanwhile, venture capital firms are a common option for businesses looking to scale quickly. Venture capital firms generally provide more funds than angel investors but are also willing to take on more risk with the promise of higher returns. As with angels, they will take a stake in the business in return for an investment.

Crowdfunding

Crowdfunding is also popular. Multiple people contribute to a funding round with the promise of gaining a return on their investment. Allowing anyone to invest means that everyday people such as your friends, family and customers can invest alongside angel investors and institutional investors.

Each has pros and cons, and entrepreneurs should consider carefully which option aligns best with their business and its stage.

Benefits of seeking investment?

But outside investment doesn’t just bring in that much-needed injection of cash – it can also bring expertise and connections.?

Experience

Investors are often experienced in their chosen fields, so they can assist entrepreneurs with strategic decisions and help them avoid pitfalls.

Reputation

There is also the reputational side – having industry names on a board brings credibility, which can help attract further investors and customers.

Networks

In addition, investors can bring their networks of suppliers, potential customers and contacts, which can lead to opportunities for new collaborations and lines of business.

Common misconceptions?

There are some common misconceptions about the investment world, which we will dispel now.

Not just for startups and tech companies

Firstly, investment is not just for startups or tech companies. While these types of businesses often need investment, it can be for any business in any sector at any stage of its lifecycle – and investors look at every opportunity. They will invest if they see the potential for a healthy return on that investment.

You do not have to give up control

Bringing in outside investors doesn’t mean an owner gives up control of their business. While many investors take a stake in a business in return for their investment, it is often a minority stake, so their level of control is limited. It is important that when entrepreneurs seek investment, they retain enough of a share in the business to maintain control.

It’s not all about the product or service

Finally, investment is not made just based on an idea or product. While these are important, investors also focus on things like the business plan, a path to profitability, the company’s market share, the team involved in running the business, and their perceived ability to achieve their goals.

Understanding the investment process

The investment process has several distinct stages.?

Develop a strategy

Firstly, an entrepreneur should develop a strategy before contacting potential investors, including assessing what funding is needed and what it will be used for.

Make sure you’re ready

It should also be ensured that the business is ready for investment. In addition to having a proven product or service, a business should have a detailed business plan that contains financial information and realistic growth projections for the coming years. Research into the market, such as its potential for growth and strength of competition, should also be undertaken.

Search for investors

When that is in place, the search should begin for finding the right potential investors. Target those with a track record in the sector and experience investing in businesses of the same size and stage in their lifecycle.

Pitch the opportunity

Once potential investors have been identified and contacted, the next stage is to pitch the opportunity to them. This is an entrepreneur’s chance to showcase the business, its products/services – and how they fill a gap in the market or solve a problem – and the potential to grow and provide a healthy return on the investment.

Due diligence

Suppose that it is successful and the investor is interested in the business. In that case, they will then conduct due diligence on it, which analyses every part of the business to assert that it is a sound business and they are comfortable with taking the risk of investing.

Negotiation and funding

If the investor is happy with the results of the due diligence, they will then negotiate the terms of the investment – including how much funding will be provided and what percentage of equity they will take in return, along with any other conditions. It is essential to take advice from legal and financial professionals here to ensure the deal is fair and the entrepreneur’s interests are protected.

Conclusion

The world of investment and how investors work is relatively straightforward, and many fundamentals apply to businesses of all sizes in any sector. By understanding what types of investment are out there and what investors look for – and preparing the business accordingly - the chances of successfully securing an investment increase.?