Why would an entrepreneur say no to an investor when research shows that most businesses crumble due to a lack of capital?
Are there valid reasons that can cause an entrepreneur to decline funding offers from potential investors? The short answer is yes. Not all investment offers are right for you.
While business funding is a major challenge for entrepreneurs, you still need to do your due diligence before accepting any cash that comes your way in exchange for a stake in your business. These are some of the scenarios when it’s OK to politely decline an investor’s offer.
1. When an investor is seeking too much business control
As an entrepreneur, you need to know not every investor has the best interests of your business at heart. Some see a great idea and want to take advantage of that by funding you and then taking control of the business.
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Don’t be blinded by the money to the extent that you lose your business. If you sense malice from a potential investor, decline the offer.
2. When the return on investment is negative
It’s important to value the input you bring into your business before you allow outside investment. Sometimes the money, resources and time you pump in as a founder outweigh the investment being offered and the valuation proposed.
The whole essence of funding is to take your business to greater heights, and if that’s not being achieved by the amount on offer, then turn it down.
3. When the money is not ‘smart’ enough
Pumping in capital into a business doesn’t necessarily guarantee positive results in terms of revenue. If you get the opportunity to choose investors for your business, make sure you choose the ones that bring more than just money to the table.
This means that you need to be smart about the networks and connections they can bring your way, as well as the work ethic, mentorship and vision they bring on board.
It’s alright to turn down an offer from an investor who can only contribute money and has nothing else you can leverage on, like their existing clientele or personal credibility and profile.
4. The nature of the investor isn’t in line with what you want
Some investors are fully committed to helping you grow, while others prefer to be hands-off from business operations. Figure out what type of investor you want in your business.
However, when you’re chasing growth and are bringing in someone with experience in your industry, you don’t want the aloof type. You want someone who can help with decision making.
You may want to have the freedom to make the final call, but it doesn’t hurt to work with someone willing to share the benefit of their experience.
5. Stringent terms of lending
An investor is supposed to be more of a business partner than a money lender. Before signing on the dotted line, take the time to critically look into the terms of your contract – you can ask a lawyer to help with this.
Some terms and conditions may end up destroying your business rather than helping it.
Look into the kind of commitment you’re making when it comes to equity share, management structure, repayment schedules and revenue growth.
What contingencies exist should your business not deliver on its promise? What kind of personal exposure do you have if things go belly-up and liquidation is inevitable?
A good investor is one who comes in willing to shoulder both the profits and potential losses – they shouldn’t just use you as a money-making conduit.
6. Greedy investors
There are investors that ask for too much too quickly. As a business owner, you should develop a third eye to be able to decipher malice in such contracts.
If it’s practically impossible to deliver what an investor is asking for in the time they suggest, decline their offer. Remember, you have to work at not being blinded by the money you so badly need.
Pursue partnerships with investors who’re willing to put in the time needed to see your business grow. Aim for investors who have a social enterprise model in their approach. Check out the KCB Lions’ Den show on Tuesdays on KTN for an idea of the kind of investors you should be chasing.
7. When the investor’s history raises red flags
The good thing about most investors is that they have a public profile. As an entrepreneur, do your research and know these people before you bring them into your business.
Avoid anyone with a history of unethical business dealings, hostile business takeovers and other malpractices. While people do change, when it comes to a business that’s taken your blood, sweat and tears to build, it may not always be the wisest thing to gamble on an investor with a dodgy past.
Regardless of the hardships of getting business funding, do your due diligence. Reach out to fellow entrepreneurs for advice and seek out expert help to avoid making an expensive mistake.
