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Startups and small businesses require investment to begin and grow. One of the most important business decisions at an early stage is whether to find potential investors. You may have invested your own money and that of generous friends and family into your business idea. You may have taken out business loans to get started. Another form of investment to kickstart your new venture is money from investors. If you are wondering how to manage investors, this article explains what business investors are and how to work with them effectively.
What are Business Investors?
Business investors are an essential part of the startup ecosystem. They tend to be wealthy individuals who provide capital to entrepreneurs to help transform innovative ideas into successful businesses. Finding potential investors is an exciting step in any business journey. Finding the right investors that fit your business plan is crucial.
The Types of Investors
Investors can come in various forms, such as:
- angel investors;
- venture capital firms; and
- crowdfund investors.
Securing investment is an exciting step towards success. Investment is a strong mark of approval for your business idea or existing small business. It is equally important to understand that the nature of the investor can impact their influence and level of control. Each type of investor may have a different goal and expectation of you. It is essential to ensure that your business plan aligns with the kind of investors you have for your business.
For example, angel investors invest their money into startups as individuals or as a group with a pool of funds. They typically have a portfolio of investments and get a direct stake in the companies they invest in. Crowdfunders, on the other hand, usually contribute relatively small amounts of money into a crowdfunding pot hosted on an online platform. Each contributor to a crowdfund may have a small financial stake in the business and often does not hold their shares directly.
These differences affect the relationship that investors will expect to have with you. Angel investors may expect a more significant say than those who have invested in a crowdfunding pot. Angels may make strategic decisions and take on advisory roles for your business. Crowdfunders typically have a different level of control. Their influence tends to be passive or limited to their financial contribution.
Another consideration includes how different investors will operate on different timelines. For example, venture capitalists (and some angels) will likely be looking to exit your startup in three to five years. Accordingly, this will impact their focus (e.g. they will want to drive growth and valuation as much as possible before the exit). Conversely, crowd funders and other angels may take a longer-term view.
Choosing the Most Appropriate Investor
If you are considering how to attract the right investors, it is essential to determine the type of investors you would like. Some aspects you should consider are the following:
- goals and objectives you set out in your business plan;
- level of interest and control you want investors to have in your business;
- type of business relationship you would like to have with them, and
- alignment of the investors (and the kind of investment) with your business.
Likewise, managing business investors involves setting clear expectations from the outset of your relationship. To do this, it helps to understand their goals, timeframes, and expectations around control. For instance, in exchange for funds, do they want a board seat or veto rights?
Other key tips include maintaining open communication (this can consist of regular updates and transparent financial reporting) and using the invested funds wisely and efficiently.
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Your Relationship with the Investors
It is vital to maintain a strong business relationship with your investors. Trust and effective communication are the foundations of this relationship. Depending on the types of investors you have, you could also gain insights and guidance from investors through their mentorship.
1. Trust
When it comes to your relationship with investors, honesty is the best policy. To have a flourishing relationship, building trust is essential. Trust is a critical quality in all business relationships. Show your investors that you are professional and competent in managing your business and the funds that they have given you.
2. Communication
Good communication lends itself to a relationship of trust. Maintain open and transparent lines of communication with investors. Update them on the progress of the business, any challenges that arise and milestones you achieve. Prepare yourself to answer questions that your investors approach you with.
3. Mentorship
The form that mentorship takes depends on the type of investors you have. However, all investors, from angel investors to crowdfunders, will be able to offer you valuable insights.
Investors can offer industry knowledge, market expertise, and networking opportunities throughout your business relationship. You should also seek their advice when needed and ask for their input when making big decisions. Building a mentor-mentee relationship with investors ensures that you leverage their knowledge and create the best chance of success for your business.
Key Takeaways
The three key pillars of your relationship with investors are:
- trust;
- communication; and
- mentorship.
Business investors play a vital role in kickstarting the growth of new businesses. The type of relationship you will have with investors heavily depends on the form of investment they have and the level of control they want. Types of investors include angel investors, venture capitalists, and crowdfunders. Ensure you align your business strategy with the kind of investors you want to attract.
To manage your relationship with business investors, ensure that you:
- set clear expectations;
- maintain transparent communication, and
- use their money wisely, according to your business plan.
If you require advice relating to your business or its investors, our experienced startup lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
Many types of business investors exist, including angel investors, venture capitalists and crowdfund investors.
To effectively manage your relationship with business investors, it is essential to establish clear expectations, maintain open communication, use their funds wisely, and embrace their mentorship.
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