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Tuesday, July 2, 2013

Is Outside Investment Worth It? Dealing with Angels

One of the mistakes entrepreneurs make, and there can be many, are that they establish a business for the wrong reasons.  One of those reasons is greed. 

The entrepreneur will start a business with an investment of his personal savings or money provided by mom and dad, friends and family.  Sourcing of money may stop there and the result is that not enough money was raised to viably keep the business going.  The entrepreneur bootstraps and scrimps in order to keep his head above water.  Why didn’t he raise enough money in the first place to properly run his business?

An entrepreneur may feel that he wants to keep the business all to himself, and doesn’t want any investors involved because his share of the profits or control of the business will be minimized.  He wants to keep the equity all to himself with 100% control.  I have heard this a lot from entrepreneurs that they do not want to have an investor, loose control of his business and possibly work for someone else.

But let’s think about this.  With the entrepreneur’s limited amount of money he is not able to grow the business with any reasonable speed; he is bogged down by the balancing act of getting in revenues and paying bills.  He cannot possibly think about growing his business or introducing new products.

With an investment by an angel investor the entrepreneur will be able to grow the business, introduce new products to new customers, and have a mentor within reach to help guide the business to new highs. Angels are the ones who invest in start up businesses. And they are the ones to pursue if you are a pure startup. 

Since an angel investor is interested in how his investment is doing, he will periodically sit down with the entrepreneur for a progress report and offer suggestions for improvement.  The terms of the investment will require preferred stock issued to the investor paying an annual interest rate for the use of his money.

The typical investment period for the angel investor is five years, and he may invest up to $1 million.  Angels frequently like to invest with other angels.  After the investment period he will exit the business by either having the entrepreneur return his principal or seeking other investors in the enterprise.

So you see, having an investor is not a bad thing.  He can help your business grow, act as a networking source, introduce you to potential customers, new suppliers, and strategic partners they know well from their own business dealings, and help you take the business to the next level where many beautiful things can happen.  Without his help the entrepreneur may not be able to achieve this growth.

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