How to survive an equity investment

In general, if you need to pay interest with borrowed money you are in a danger zone. You probably need equity instead. Equity needs no collateral and it needs no interest. It is not free money, it can be very expensive, but it has special features. You pay the investor when you have success. Therefore it is more patient money. If you make no money, you hardly pay anything. If you are making a lot of money, you pay relatively more.

Investors get shares in the company and profit from dividends, maybe interest on subordinated loans and the increase of the value of the shares.
Investors come in all sizes and shapes. Starting with friends and family. Sometimes called; Friends, families and fools. Personally I don’t think these people are fools. 80% of the new companies are financed this way. As an entrepreneur you can make use of this source if you make sure that you a) the money you receive can easily be missed, b) you don’t promise anybody anything and c) you don’t buy a car or on holyday straight away. Also: do everything to pay these people back.

The next group you find the private investors, wealthy individuals who invest in unlisted companies. Depending on the amount of money you need and the stage of development of your company, you either end up with the Angel Investors who invest in early stage and technology (50k$ - 500k$) and the Informal Investors who invest in later stage and do lager amounts (150k$ - 1.5M$). Venture Capital funds invest in later stage of management buy-out (1.5M$ - 15M$) and Private Equity funds do mostly acquisitions up to 1 billion $.

For this article I will focus on the private investors. This is a special group, mainly focused on SMEs in all stages of their development and I would mainly like to focus on the Angel Investors because they are very useful to early stage companies and they are not well understood.
Private investors make op a market. If you need an investor you will need to do some marketing. Ask yourself what kind of investor you need and what you might have to offer this investor, just like you would market you own product or service. I general the private investors market can be divided in four segments. Good investors and bad investors, investors suitable for you and investors not suitable for you.

Whether an investors is suitable for you depends mostly on you capital need, your activities and the development stage of your company. If an investor is not suitable for you, don’t waste your time on them. Most investors will indicate what they are after. Whether an investor is a good investor, is harder to say. It is partly a personal thing. An investor might be good for you and bad for your neighbor, or the other way around. Some investors are just bad period. Eight out of ten investors are completely useless. They pretend to be investors while they are actually something else. They will not bring you any success.

That is the general distinction between a good investor and a bad investor. A good investor will enhance your chances of success and a bad investor will ruin your company and you. Don’t think that money will make you happy, it won’t. It is the investor that will make you happy, or not of course. A good investor can be ten times more successful than a ordinary investor. And the good news is that when the investor is successful. The entrepreneur is even more successful In general you can say that good investors:
• Have an entrepreneurial background. Most probably they sold the company they started and they invest their own money. These investors will do the negotiations themselves. Investors are required to build a portfolio in investors and learn the trade from other experienced investors.
• They prefer minority shares. Between 10 and 40%, depending on the value of the company and the value they add. They do not want a formal position in the company, they are not on the board and do not need to have the final say.
• They are more interested in business than in money, good investors will talk to you about your product/service, your clients and your business model. They want to know how you are going to make them rich. Bad investors only talk about money, risks, guarantees etc. They want to know how rich they are going to get. They show no interest in you.
• Investors make money when you make money, they share in the profits and expect you to do the same. They do not require collateral or excessive interest payments, they do not require management fees or payment in advance for due diligence and they certainly do not require part of your sales turnover.

So when you meet an investor who has never invested before, wants a majority stake or a management position in your company, expects you to pay him for services, only talks about money and needs collateral or guarantees or brings a lot of advisers during the negotiations, please politely excuse yourself and walk away, to never come back.

I wish you good luck,
Nils de Witte