Business investors come at a cost
ASKING the public to help fund everything from New Zealand’s first cat cafe to a travelling milk and cookie bus, Kiwi businesses are making the most of the newest ‘it’ thing to do.
Crowdfunding is one way to get wealth but small business owners should not forget other, potentially more suitable, ways of finding that much-needed money.
PWC executive director John Dobson said before any business owners even considered trying to raise capital, they needed a good business plan, a specialist lawyer who can navigate the various legal issues involved and they need to have asked themselves the questions: Do I have to raise capital? Can the business be funded through personal equity or revenue? Can we handle outsiders having a say in the business? ‘‘If you’re a control freak, having outside investors is not the way to go,’’ Dobson said.
If there was no way around that, one of the cheapest ways of getting money was to borrow, within a personal comfort zone, from the bank, Dobson said.
Another common option was to go to family and friends, which is more fraught with risk than people may initially think.
Dobson said relationships get put under a lot of stress when businesses go wrong.
‘‘I’ve seen a lot of families broken up because of a bad business venture. It’s hard for family members investing to do the level of due diligence they might have otherwise done if doing an arm’s length investment,’’ he said.
Other options include: Angel investors and venture capitalists: generally, these investors provide money in exchange for high returns and ownership of a part of the company Employee shareholding: key employees are offered a small package of shares to secure their loyalty and provide an added incentive to perform, provide a platform for owner succession or recapitalise the business to fund growth Equity crowdfunding: different from crowdfunding through websites like Kickstarter and Pledge Me, where businesses offer a service or product in exchange for money. Equity crowdfunding is an online way for investors to fund start-ups and small businesses in return for equity, or value, in the company. Doing proper due diligence by asking questions of the investor, meeting them, even Googling, is essential to avoid potential headaches later on.
Dobson said he had a client who did not perform due diligence on an investor, who caused the company to go bankrupt. A simple Google search would have shown the person had already been convicted twice of fraud.
‘‘Finding someone to put capital into your business is a bit like courting for marriage. If you don’t get it right and you don’t get the right partner, it can be horrible,’’ he said.
Dobson said it was a good idea to find investors who not only truly believed in the business but who could also add more than just cold hard cash, such as governance skills and useful contacts.
Creative HQ’s head of customer engagement Nick Churchouse said it was important to understand what investors wanted out of the business.
Banks want collateral to secure against the risk of lending money. This could be a house, other assets or a significant track record.
Although still too early to truly understand, crowdfunding investors seemed to look for a great story that they want to be a part of, Churchouse said.
Angel investors and venture capitalists look for a high magnitude of potential return – typically 10 times the investment made.
‘‘You have to be thinking about big markets, you have to be thinking about high revenues within the medium term,’’ he said. They did not fund part-time businesses, ideas or companies that did not understand who the customer was.
‘‘It has to be a journey you’re in love with and you have to be clear about what you will or won’t do to gain investment.’’
‘If you’re a control freak, having outside investors is not the way to go.’
John Dobson