How does getting investors on board work?


Like say you’re starting a new business and you want investors to help fund the start up, how does that work?

In: 1

You call people, ask friends, and spread the word.
Then you collect them and propose a deal, typically a portion of the company, for a certain amount of funding.
If they are okay with the deal, they give you money, you give them portion of whatever you do.

You go around to anybody with money who will listen and pitch your business idea until people give you money for a partial ownership stake in the company.

One of the hardest part is finding the potential investors. So-called “angel investors” and venture capital firms are generally involved for things like high-tech startups. You usually need to make contact with someone like an investment banker who knows all the players in that space to even get you in to see them.

For small businesses, your local banker might be who you need. Either to give you a small business loan or to help you find potential investors.

Or perhaps you know some rich people. Or a bunch of semi-rich people.

You will need to be able to convince the banker (or whoever) that you are worth the time. You will need to show them that you have a business plan and a viable strategy. Not just an idea, but actual numbers and the assumptions that went into coming up with those numbers.

Then you go through that process again with the potential investors. Possibly many times, as not everyone is likely to want to invest in your business. You need to have the ability to concisely convince people that your business will work, and hopefully make money for your investor(s).

Once you have investors, you get a contract drawn up with the terms. Sometimes a much shorter “term sheet” is done as a precursor to this, to outline what the terms will be in the final contract. The investor, of course, wants to know when they will be paid back and how much. Or they want to know what percentage of the business they will own and what limits exist to their ability to decide how it operates.

It varies widely depending on the business but the gist of it is this:
1. First, you need a business plan. In this plan, you plot out what you expect to spend to get off the ground, what you plan to make, and what profits you think you’ll get. You then put this into a format where other people can easily review and see if they agree. You may also come up with materials to showcase your idea in the best light.
2. You then have to find people who would want to invest. You would show them your materials, and they will ask questions and try to poke holes in your idea. Have you underestimated your costs or overestimated your revenue? Where are the risks things don’t go as planned? If it’s an actual, operating business, they’ll do what’s called due diligence, which is just a fancy way of saying they will look for themselves to see if what has been said about the business is true.
3. If they agree to invest, they will then decide on a structure. If it’s an equity investment (most start-ups are), and if so how much? Some investors will do a preferred equity. If it’s debt, they need to iron out terms such as interest rate, fees, and collateral. Lawyers are usually involved in this stage.
4. If all that goes to plan and the documents are signed, they then fund the money. They will almost certainly request some kind of reporting to check on what’s going on with the company, and may request board seats. Equity investors often will demand board seats as part of their investment.