Launching a new idea, new business, new brand — you're trading money for ownership

Watching the launch of a NASA space rocket burn through 80% of its fuel on take-off, just to get off the launch pad, always reminds me of just how much effort is required to launch a business successfully.

The shared determination and the alignment of all involved will be reflected in the success of the launch—or the disaster that misalignment can bring later.

In this article

Starting a business burns through a great number of initial costs that can be really difficult to measure.

Launching and sustaining a new business is not for the faint-hearted.

We all know it's true

The primary reason many businesses fail is simply a lack of cash flow; or better said, an inability to anticipate the funds required to boost them through each defined stage of the launch.

One of the reasons businesses use investors is to help them break free from the constraints of relying upon organic growth and accelerate their growth and capability. Without an investor, owners are left to fund every step of the startup cost themselves, as well as managing every aspect to keep the business in orbit.

Every business starts with an investor - the founder

Investors are usually investing in the business founder; their idea and their ability to maintain motivation, drive, and focus to build a great business and consistently deliver a great service or product to the market.

The early launch risks are the highest risks

The earliest risk to a business is its owner becoming burnt out by overwhelm and pulled into spending too much time on administration rather than finding customers and selling widgets. This is when the risk of a business stalling, failing to accelerate, and ultimately failing, is highest. Sadly such failure usually means the loss to everyone who depended upon that business's success.

Investors exchange fractional ownership for money

Business investors lend capital (or in some cases equity) in exchange for partial ownership of your business. Today many investors also bring their expertise along with their existing commercial relationships and networks, as part of the deal.

Engaging the booster rockets of Series A and Series B funding

In the same way, different booster rockets are used at each defined stage of a launch to break through different levels of flight, so businesses can use a series of different investors to help get past those same growth stages.

Sometimes only an Angel can help

Angel investors are individuals (or representatives of the investment arm of a Family Office) who might invest in a business in exchange for ownership equity. Their investment decisions are often more about a calculated chance of the future success of a particular novel idea or service, or for a host of other reasons usually outside the investing criteria of a traditional bank.

But Angels aren't forever

Angel investors might provide seed capital early in a business's growth cycle but usually expect at some later stage to be replaced by a different type of investor with different expectations. These next booster stages of business growth are often referred to as Series A and Series B funding.

  • While the terminology can sound confusing, it merely refers to the different development stages of the businesses that are raising investment capital from different types of investors.
  • The main differences between funding rounds are the maturity levels of the businesses, the type of investors, and how the capital will be allocated and put to use.

Exchanging money for control

The reality is having investors in your business means diluting your ownership of your business. Many larger investors have high expectations about returns and put pressure on business owners and the business direction. Because they now have a partial ownership interest in the business, their interests may lie more in maximising their own returns rather than the direction and success of the business.

Doing business with family and friends

There are many horror stories of the problems of doing business with friends and relatives. But many of these issues are more about missed shared alignment, commercial ability, and deeply shared interest. Wherever there is an imbalance in these areas, regardless of who the investor is, the advantages to be gained may not be worth the investment received.

Get it in writing and get it legal (otherwise, you’ll look like an amateur)

Putting a Shareholders Agreement in place early can help manage expectations where there is money or shared ownership involved. A Keyperson Agreement with an appropriate level of insurance cover can also provide the appropriate structure and protections to benefit all parties concerned equally.

The importance of being philosophy aligned

Investors can bring money and experience to your business -but money rarely comes without some changes having to be made. In the same way, a staff member who's not aligned with your business culture, values, and vision can damage and delay the growth of your business, so a misaligned investor in can damage and delay, (even destroy) your business growth too.

The last word

As your business begins to position itself to accelerate through the different segments of market growth, the alignment of your team, including your investor, becomes the next significant indicator of your success.

Drew Browne Modern Small Business thought-provocateur
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