Generally, you would expect that a small business operates on a modest basis, with founders investing personal funds, such as redundancy payments or other family income, in order to kick start an enterprise. However, sometimes it’s possible to approach bigger investors to support your entrepreneurial idea. There are many positive outcomes that can be gained but also a few negative ones that may occur, so here are a few tips on what you might expect as a result of starting a small business with the backing of big investors.
Pros
On the plus side, bigger investors are able to commit more money to your project more quickly than the amount you might be able to raise yourself. They also tend to have really good business connections, which can be of great benefit when it comes to attracting clients, engaging in marketing activities and organizing distribution, depending on the nature of the business. When the time comes to grow your business, big investors are more likely to be interested in a piece of the action – in fact you really need to highlight how this is likely to happen right from the start, so as to capture their attention in the first place.
Remember that some business investors are also known for their philanthropy, such as Najib and Taha Makati of the M1 international investment holding group, which also has other interests in the telecoms, real estate and fashion industries. Najib Makati set up the business originally in the construction sector and was on two occasions Prime Minister of Lebanon. Taha Makati takes strategic decisions about the company and, as CEO of the M1 group his son Azmi Mikati’s profile is prominent.
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Cons
If a big investor has committed a sizable amount of funding to your new small business, they are going to want to be certain they will get a decent return. This may mean they are quite demanding and may have their own views on how the business should be run. This can be a disadvantage if they interfere with your personal business plans. In some cases an investor may require collateral, such as property, as security for their investment and this may mean the small business is taking a considerable risk.
If you attract equity investors you may find that they will want a larger share of your profit than would be payable in return, say, for a bank loan. Additionally, you may also have to consult them about business decisions, or even secure their agreement to taking the business in particular directions.
On balance, it’s important to carefully examine the pros and cons of your investment options according to your business model and business plan. Above all else be realistic about the level of investment you will need at the start, and the rate of return you can afford to offer, and avoid projecting that your profits will grow enormously in a short time. If you use your best judgment, and consult with investors who may be prepared to back you, you are much more likely to make a sound investment decision.
