Part 1: Potential Investors – Pros and Cons

If you’re preparing to seek investment capital, you need to understand which type of investor may be interested in investing in your business. There are several different categories of investors, and each class has unique objectives and preferences that require different approaches.

Potential investors include (1) competitors, suppliers, and regular customers; (2) friends and family; (3) angel investor groups; (4) employees; (5) financial investors; and (6) strategic investors.

I’ve broken the discussion into two parts. In this first part, I’ll cover competitors, suppliers and regular customers, friends and family, and angel investor groups, along with the pros and cons of each. Then, I’ll cover employees, financial, and strategic investors in part two of this series.

Competitors, suppliers, and regular customers

All of these parties may be interested in investing in your company. You may offer a complementary product, distribution channel, or geographic location that is attractive to them. Rather than starting from scratch, competitors may be interested in investing or acquiring your company to gain access to your distribution channels and geographic locations. Suppliers may invest because, when your company grows, you will buy more supplies from them, and their businesses will also grow. Business customers may invest because you offer a complementary product, and their investment will give them access to your customers, distribution channels, and geographic locations.

Pros: Working with these investors allows you to collaborate with individuals who understand your business and are motivated to help you succeed.

Cons: These include working with individuals who may not be professional investors and lack experience formally setting the objective for their investment. A conflict could result from a difference in unstated expectations and not addressing the method for resolving conflicts at the beginning of the transaction.

Friends and family

Investors who have a personal connection may be willing to invest because they feel loyalty and affection for you.

Pros: The first upside of working with friends and family investors is that you don’t have to spend time searching for investors. The second is that closing the transaction and funding the company can take a shorter time. Also, the transaction costs less to complete compared to other types of investments.

Cons: Friends and family might make smaller investments than people outside your close network. If the company downtrends after the investments are made, it could result in financial hardship for friends and family. In addition, if something goes awry with the business, blame may be assigned, and irreparable family squabbles can ensue.

Angel investor groups

Angel investors are high-net-worth individuals seeking high returns through private company investments. Many are successful entrepreneurs or have experience investing in early-stage companies.

Pros: These investors are well-versed in transactional matters and have conducted in-depth research on your industry. They may be willing to use their expertise to mentor you and help grow your business.

Cons: Often, there are higher transaction costs and more time required to complete investor due diligence.

 

In part two of this series, I’ll discuss employees, financial, and strategic investors and their advantages and disadvantages.