Finding Private Startup Investors: The Advantages and Disadvantages

By Fernando Berrocal

In the pursuit of startup capital, all entrepreneurs will weigh the advantages and disadvantages between private investors and institutional funding. The average small business requires approximately 10,000 dollars to start, according to the Small Business Administration (SBA). This sum increases with expansion-related costs, such as payroll for new employees.  A financial strategy for bankrolling operations is a crucial aspect of your business plan worth contemplating. In this article, we've put together a list of benefits and drawbacks to evaluate whether private (or institutional) financing is the right choice for your startup.

Private Investors

Although many small business entrepreneurs use a combination of self-funding and different types of loans, you also have the option of finding a private lending or venture capital (VC) solution from outside business investors. This type of investment has its own benefits and drawbacks; regardless, the advantages may be sufficient to carry your business forward.

Advantages of Finding a Private Investor:

  1. It’s Not A Loan: While business loans might be a great way to get money, you'll have to pay them back regardless of whether your business eventually succeeds. Outside investors are aware of (and accept) the risk of losing money if your concept fails. In other words: you are not liable for repayment. However, ‘investor’ should not be confused with private investor loans. In a private lending scenario, investors are offered cash in exchange for a  loan using private real estate. It's a viable alternative to banking and other institutional loans.

  1. You Don’t Need a Proven Credit History: Some business lenders have strict credit and financial history requirements, which can make the application process difficult and leave you with no guarantee of approval. Private investors, on the other hand, are usually more interested in the money you can potentially make than what you've made previously. As a result, they're ready to take on greater risk.

  1. You Have Access to The Investors’ Expertise: Many business investors have substantial experience running businesses and may even be experts in your field. As a result, they can supply you with information that you wouldn't otherwise have. You may learn from veteran investors' experience and use it to boost your chances of long-term success. According to Harvard Business School research, startups supported by notable angel investors often outperform those without similar mentorship.

Disadvantages of Finding a Private Investor:

  1. It Dilutes your Earnings Share: Most investors anticipate a share of your profits in exchange for their money. If your business succeeds, this restricts your upside potential. While pooling stock in your business may not prohibit you from reaping the benefits of your hard work, you'll want to be sure your investors don't take too much of your profit margin. If they do, you will not benefit from this private investment in the long run.

  1. The Stakes Are Higher: Your potential investors are primarily concerned with generating money. They usually have greater performance expectations in return for taking on more risk, which puts a lot of pressure on you as an entrepreneur. Before taking venture capital funding, be sure that your investors' expectations are in line with your estimates and capabilities. You should search for backing elsewhere if your aims aren't matched.
Drawbacks of Private Investors

  1. You May Lose Some Control: The majority of investments have conditions connected to them. You're accountable to more people than just yourself when you have additional stakeholders in your business. Your investors may demand to be included in the decision-making process, or they may want you to obtain approval before implementing a new plan.  At the very least, you'll have to justify why certain business decisions were taken. You'll need to feel comfortable sharing control of your business with your investors unless they're ready to adopt a fully hands-off attitude.

How to Find Investors for Your Small Business:

After considering these benefits and drawbacks, you may conclude that having an investor will best support your operations. In the following list, we'll give you some ideas on how to attract investors:

  • Social Media: Many entrepreneurs use social media to connect with potential investors. Be sure to conduct thorough research so that you don’t fall for any internet scams.
  • Friends and Family: You could have relatives or friends that wish to invest in your expanding business. Although having an existing connection with your investor might be advantageous, be mindful of unforeseen difficulties that can occur with relatives or friends.
  • Platforms for Crowdfunding: Nowadays there are a variety of internet platforms that link prospective investors with small business owners. Be sure to choose the one that is more beneficial for your business.

Conclusion: Consider Your Options Before Taking on Investors:

Most small businesses rely on financial resources to survive.  Small businesses that run out of money account for 29 percent of all failures. While you may be tempted to take any cash you can get, it's critical to assess the risk profile of each choice prior to committing.  Outside investors aren't ideal for your organization if you don't want to give up a share of your profits or be held accountable for your actions by others. Access to a private investor’s knowledge and expertise, on the other hand, may just be what your business requires to thrive in the long run.

Ready to bring your startup to the next level? Apply to MassLight’s next batch. MassLight supplies capital and a dedicated tech team. We take equity in return. Have questions? Refer to our FAQ page.

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