Deciding if investing capital is right for you
Investment capital is best for:
- businesses willing to give up some equity
- companies in the early stages of business that need funding to bring a product or service to market
- existing businesses looking to grow.
If your business isn’t performing well or is just an idea, you are unlikely find any investors. A financial advisor can help you decide if getting investment is right for your business.
New Zealand Trade and Enterprise (NZTE) offers InvestEd, a free learning resource designed for businesses looking to raise capital.
Types of investors
Angel investors
Angel investors look for a person or team they believe in. They usually get involved just beyond the start-up phase, when capital is needed to develop and commercialise products and services that have been validated.
Venture capitalists
Venture capitalists often invest large amounts of money and are more hands-on. They often expect more control and ownership in exchange for their funding and expertise.
You’re more likely to get support from venture capitalists if your business:
- is already generating revenue
- has a proven commercial model
- is looking to scale up sales or manufacturing efforts.
Pros and cons of investors
Always weigh up the potential benefits and risks of getting an investor involved in your business.
Pros of having investors:
- Large amounts of capital that banks won’t necessarily lend to you.
- Expertise – it’s common for investors to become business mentors or board members.
- Access to new networks and markets.
- A committed partner who wants to see you succeed.
Cons of having investors:
- Loss of control – depending on what sort of agreement you have with your investors, you’re giving up a percentage of your business or returns.
- Being forced to sell – investors make most of their money when you sell your business. They might push you to exit, even if you don’t want to.
Time out from running your business – it takes time and effort to build relationships with potential investors and pitch for capital.
Planning to invest capital
Successfully pitching for equity capital takes time and strategic planning. Many businesses put a plan in place years before they actively seek investment.
Most investors are putting their own capital on the line, so they’ll want proof their involvement will be treated seriously, and their contributions will eventually pay off.
Plan so you can show potential investors a history of solid financial performance, or a strong business model and promise to grow.
An accountant or financial advisor can help you put an investment plan in place.
What investors look for
It's important to demonstrate how you will use any capital to grow your business and make good returns.
Potential investors will also want to see:
- you have invested in your business yourself
- you’re a good leader, with a track record for success
- a robust and capable team around you
- sound projections and cash flow forecasts
- a history of strong profit and loss statements
- a solid business plan
- a proven business model
- a unique selling point or intellectual property
- potential for high growth
- good governance
- a well-thought-out exit strategy.
In addition to the projected return, investors will also want to know what role they’ll play in your business.
An advisor can help you see if you’re ready for investors and help you prepare to pitch.
Getting to know your potential investors
Do your research on any potential investors before you accept their offer.
You should:
- take your time and not rush your choices, as this could be the start of a long-term business relationship
- get a sense of their motivations and experience – investors will want to be more involved than those who provide other sources of funding
- get references from people they’ve done business with
- get clear on what they expect in return before you commit to any offers.
How to find investors
There are many ways you can find potential investors, for example:
- tapping into your personal networks
- speaking to your local chamber of commerce or Regional Business Partner
- approaching business angel networks that connect entrepreneurs with angels and private business investors – there are several networks in different regions of New Zealand.
It's a good idea to speak to a financial advisor and your Regional Business Partner Network for support.
Common mistakes
Avoid these common mistakes when you get investors on board:
- Not planning – securing investment capital takes forward thinking.
- Approaching investors too early or too late in your business lifecycle – there is an optimal time to pitch for investment capital.
- Not checking up on your investors – get references and check the expertise they can bring to your company.
- Seeking investment because you need financial support or don't want to spend your own money on your business.
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