To attract outside investment in your business, you may need to radically alter some of your thinking in regards to your business and also the nature of outside investors.
While banks may require financial statements and keep a close watch on your progress, the level of intrusion in your business from outside investors is likely to be far more intense and their scrutiny more thorough. Another basic difference is that banks are not interested in taking an equity stake in your business, whereas most outside investors require this. On the other hand, outside investors can offer many advantages to your business beyond the money investment.
To start with, here’s a thought for you: outside investors, particularly at the venture capital level, are more interested in the business than the product.
Another way to put this is that there are many ‘brilliant ideas’ in the world, but far fewer business teams capable of executing those ideas. If you’re at the much earlier stage where you’re just a person with a ‘great idea’ and a rough prototype, you need to look at other ways of growing your business. Look for your funding elsewhere, or contact the organisations that specialise in early stage help.
Encouraging small businesses to receive outside capital
There are many New Zealand small businesses that, if funded properly, could compete effectively in international markets. Many small businesses have brilliant ideas, products or services but cannot grow sufficiently due to lack of capital. Or worse, they go to market too late and fail to exploit the potential of that brilliant idea. However availability of capital is not the only reason why these small businesses miss out. The real reasons more commonly include the following.
The owner does not want to give up control
New Zealand small businesses tend to be run by owner operators and founders, which has encouraged a particular culture among small business owners. they tend to:
- Be self-reliant, with the owner/operator responsible for most aspects of running the business. Consequently they do not take kindly to being given advice or being told that they need help.
- Like total control. They hate giving up authority to anyone, which is why they wanted to be self-employed in the first place. Having two people make decisions is just not in their make-up. It is either their way or no way.
- Find it difficult to delegate. They want to be involved in everything, and find it almost impossible to give up some of their involvement to an investor or employee.
- Dislike debt. If they need any money, they tend to borrow it from a bank, and then focus on paying this back as quickly as possible. Owner operators typically try to stay away from banks or being in debt to anyone.
- Confuse ownership of their business with management control. They think that if they do not own 100 percent of the company then they do not have 100 percent control.
The chances of these types of small businesses ever accepting equity funding are remote, as by its very nature equity funding requires some trade off between ownership and cash.
Owners are reluctant to share their secrets
Confidentiality is a key limiting factor. Innovative companies controlled by very independent and autonomous founders are typically reluctant to share their ideas with anyone. To encourage these businesses to seek assistance a trust factor has to be established and a certain level of confidentiality guaranteed. Small businesses who do not reveal the whole story because they fear breaches of confidentiality will also find fund raising difficult.
Small businesses don’t know how to be ‘ready’
Being ‘ready’ involves having your business in good shape. Small businesses requiring capital are often unaware of what’s involved in raising capital. They don’t understand the process, or don’t know where to go with confidence to discuss their ideas and seek assistance. Additionally, many of the business owners have excellent development and innovation skills, yet weaker business management and planning skills. This makes them an excessively high risk for any investor. Investors are interested in the business as a whole – not just the product.
Small businesses can’t afford the high fees
Small businesses find the cost structures associated with venture capital prohibitive. Many are used to either not paying for advice, doing the work themselves, or getting a poorer quality consultant. If you are serious about raising capital then you must be prepared to meet some costs. Professional hourly rates can start at $200 an hour, but of course these fees can be great value for money.
Approaching the wrong investors
Many small business people don’t understand that most venture capitalists and many angel investors are often simply not interested in smaller deals or loans. The investment risk is extremely high, and the transaction costs (the time it takes them to research your proposal) often mean that high-risk ideas requiring relatively small capital inputs (under $500,000) won’t get looked at.
However, there are organisations and other sources of funding that are interested in smaller deals, ideas, and the possible opportunity to help commercialise an idea or prototype. Your chances of success will be enhanced if you approach the right kind of investor for your stage of development.
Kiwis have traditionally had a strong DIY (do it yourself) culture. Unfortunately this extends to be the way we run our businesses. We tend to dislike giving up control and ownership of our businesses. For many people the whole point of being self-employed is that others can’t tell you what to do. So selling some shareholding of your business tends to go against the grain.
However this attitude has to be placed to one side if you intend to accept capital for your business. Most people including angels and venture capitalists will want a share of your business. For them this is where the greatest return is made.
So what do you really want?
- Personal growth.
- Career satisfaction.
- Eventual exit.
It is highly unusual to get all of these. what are you prepared to give up? Look at the list, only control is expendable, the others are not. Remember, there’s no limit to your business, if you don’t mind who has ultimate ownership (but not necessarily day-to-day control).
Accepting capital from outside your business can be a complex and tricky operation. If you do it correctly, the rewards can be beyond your wildest dreams. But traditionally small businesses are very bad both at receiving and managing outside funds. Be well prepared for your business to come under scrutiny (and possibly criticism). Try to remain focused on your overall long term objectives and consider what you are really prepared to relinquish to help you achieve them.