When to say no to an investor

You’ve done your research and gone ahead and got started on your dream. This is more than most people are able to do, so kudos to you.

So now you have a great idea that solves a problem and also has the ability to provide you with a source of living.

But then you get to a place where you need to take your business to the next level. And you require funding for this.

Enviable minority

What do you do? What source of funding is suitable for your idea? Is any funding good funding when you’re starting out?

Most entrepreneurs finance their startups using money from family and friends, or from personal loans and credit. A tiny percentage get their money from angel investors and venture capitalists.

If you attract a venture capitalist, you’re in the enviable minority whose diligence and creativity have shone through enough to pique the interest of a seasoned investor.

But what’s the reality of the funding options that are at your disposal?

1. The unsophisticated investor

Let’s start with the investors who are closer to home. Friends and family account for a large portion of startup funding all over the world.

What’s more, for these sorts of businesses, the fundraising starts and ends with friends and relatives, with no cash injection coming from third parties.

While this kind of funding may be the easiest to access, it comes with considerable risks.

Firstly, there is the moral/ethical issue of taking a chunk of assets from people we’d call unsophisticated investors.

Secondly, there is the issue of taking money from someone you want and have a long-term relationship with. The Bible warns, “the borrower is slave to the owner”; while Shakespeare’s Hamlet cautions that “... loan oft loses both itself and friend”.

So while it may seem attractive and relatively easier to obtain your mum’s savings or grand-dad’s golden handshake, the relationship may be too precious a commodity to gamble with, and you may do well to respectfully decline their offer to help you out.

2. The aggressive investor

The second situation occurs when you are faced with a choice between a strategic investor and a financial investor.

The crucial difference here is that while the financial investor is motivated by a future increase in your company’s value, the strategic investor may have an agenda different from yours.

Financial investors see the potential in your business, and bring on board financial skills that would increase your (and their) returns, while also reducing your risks.

Strategic investors, on the other hand, usually buy into your company for what it would do for their businesses. As a result, they may be quite aggressive about compelling you to follow their plan, and end up leading you down a path you did not envision for your company.

3. The greedy investor

The other scenario that may lead you to saying no is when an investor offers to purchase equity in your business for rather dubious reasons.

You may be fantasizing (because that’s what it is, my friend) that you can leave the whole fundraising exercise to him or her. Accepting an equity investor is like accepting a spouse, with their unique ways of operating and their right to a say in the day-to-day running of the company. How the investor deals with you in the initial stages offers a glimpse into the kind of partner you would be welcoming into your company.

And sometimes, an investor may be more trouble than they’re worth. You might find yourself having to give up more control of your operation than you wanted to secure funding. This may be a good option if your startup has rapid-growth potential, but it has its risks as well.

Obtaining considerable funding may mean giving up some or all of your leeway to run your operation your way.

And the danger is that once you give up too much, the investor who ends up with control can become your boss, with the ability to fire you and remove you from the company you started – à la Steve Jobs and Apple.

In the end, the financing decision is yours to make, based on your business circumstances. Do you want to grow painfully, slowly and diligently and reap all the rewards yourself, or do you want to give up some rewards for quick growth? It’s your choice, but with due diligence and a clear vision for your startup, you’ll be able to recognise a true partner to progress.