One of the biggest challenges of small business owners is access to capital. And regrettably that access can be challenging whether you are a startup or in growth and scaling mode. I’ve seen our clients use some pretty creative ways to bridge the access to capital gap: everything from robbing Peter to pay Paul (i.e. personal and business accounts used interchangeably) to 2nd mortgages, maximized credit cards and asking employees to take a temporary pay cut to ride the tide.
While these methods can be very effective in the short term, they can be limiting and they are not the best long term options. If you are in this situation– have you considered investors??
There are two common kinds of investors: venture capital investors and angel investors. Both will take an equity/ownership stake in your business in exchange for an investment of funds. Which is better for you? It depends on a few things like:
How much money you need?
How long you’ve been in business?
How much equity/ownership you are willing to give up?
What are your long term goals?
To help better inform your decision, consider the following definitions and modus operandi:
- The average investment value is $10 million plus
- The expected returns are on the order of 25% to 35%
- Venture capitalists are not usually investing their own money– they invest from a pool of resources
- Venture capitalists prefer to invest in a company that has a proven track record because this mitigates risks
- They will take an active role in your business, sometimes requiring that you set up a Board of Directors and requiring a seat with voting rights on that Boar
- Invest their own money. There is an accreditation process where the angel investors have to prove that they have over $1 million in net worth and an annual income of at least $200,000.
- The average investment is $300,000.
- Angel investors expect a return of 20% to 25%
- They will generally invest in startups. Their investment decisions are very often based on the passion and interests of the individual investors.
- Most angel investors will act as mentors.
A lot of small business owners will turn to trusted family and friends for business and working capital investments. Those people play more of an Angel Investor role.
And don’t forget– whatever route you take, make sure you get a contract that lays out all expectations (including exit strategies!) and make sure that you and your investor are on the same page regarding company culture, core values and future industry trends.
A final note for women owned businesses: be intentional about retaining 51% ownership, management, independence and control of your business no matter the type or level of investment or you will lose your WBE designation and certification.