The Benefits and Risks of Outside Investment

outside investmentAs your business grows, you may decide it is time to scale up and grow. To do this, you need capital. You can fund the growth from your business earnings, your personal money, or outside investors.

 

The Grass is Always Greener

If an investor is ready to put capital into your business, they usually paint a great picture of what the relationship will be like. They will lend their expertise to help the company grow, you still maintain independence, and you are free to run the business as always.

That is not always how it works.

These are not the super busy “sharks” from TV, you are more likely working with professional investors that like to control their money, ownership stake, and direct the business.

 

Investors Want Control

If you work with an angel investor, venture capitalist, or other professional investor, they are going to want control. In many cases, those investors will want a large ownership stake in your company in exchange for their capital.

If you agree to give away more than 50% of the company, they are your new boss. If you give away exactly 50%, you have a partner you have to consult with when making big decisions. Any less, you still have technical control over the company.

However, that doesn’t mean no stress and no worries. Your investors will likely want constant updates, have suggestions, and will want you to report to them regularly and expect action on their requests. This is not always a friendly, cordial experience if you are not blowing away their expectations.

 

Take Advantage of Investors

If an investor has money in your business, they have something at stake too. When that is the case, they are going to be happy to help you where they can.

Expect industry connections, best practices ideas for your operations, and a sounding board for new ideas. While they do want to control their investments, they do so because they want to succeed (or because they have a big ego).

Just watch the show Shark Tank, and see how these investors act.

 

Understand What You Are Getting Into

This post is not designed to discourage you from taking investments, it is to make sure you are aware of the benefits and risks. It is not all bad news, and it is all good news. The key is to understand the benefits and risks before making a decision and leveraging the knowledge to take advantage of the resources at hand.

If you take an investment from an outside investor, leverage the investor to help the business grow. Build your relationship for long term success and you will both succeed, as long as you have the same goals.

If you don’t take the investment, look to other companies that have succeeded in your industry for a model with which you can succeed.

What are your thoughts on takin on outside investments?

About Eric Rosenberg

Eric is a finance blogger at Narrow Bridge Finance and a serial entrepreneur. He runs a media company, flash mob company, and DJ business from his hometown in Denver, Colorado. You can read more about his finance background and connect with him around the web.

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