.How often do you hear this statement from startup entrepreneurs: “I have a great idea and all I need is an investor.” A lot.
Unfortunately, this statement is a clear indication that not enough thought has been given to creating a financial plan for the business. They simply decided to start a business — without preparation, sufficient information or even experience. And many pays a huge price for it down the road.
Before looking for an investor, be sure to prepare a financial plan for the business first to help you understand the implications of getting an investor on board. Tamara Monosoff in the book “Secrets of Millionaire Moms: Learn How They Turned Great Ideas Into Booming Businesses” cautioned against relying on an investor to get your business off the ground.
It’s best for startup and early state businesses to invest their own “sweat equity” and to bootstrap, searching every other means of funding available before seeking outside investment. That’s because (1) it can be challenging to find an outside investor at this stage; (2) they’ll typically expect a lot in return for risking their money on a largely untested concept; and (3) the first thing they are likely to ask is, “What have you already invested yourself?” If you haven’t demonstrated a willingness to risk your own money or collateral, an investor might wonder — “Why should I?”
She then proceeded to relate the story of Lane Nemeth, founder of Discovery Toys. When she was starting a business, she gave up 20% of her company to get $90,000 from an investor. She regretted that decision, especially after the business grew into a $100 million company. It was too high of an equity stake for so small an amount of investment — an amount that she could have raised elsewhere with some extra effort.