“Startups without financing are like small boats in a big ocean.”
The importance of investors in a startup is vital when it comes to accelerating the growth of the company. Many businesses fail because of the lack of access to capital or maintaining a cash flow. According to a survey conducted by CB Insights, 38% of startups fail because, either they run out of cash or they fail to raise new capital. If a business is a car, then the fuel to keep it running amongst other tools is the capital, irrespective of the level the business has reached – most importantly a startup. Capital facilitates the processes used in production by enabling entrepreneurs and company owners to purchase capital goods or land or to pay wages.
Investors are individuals, business entities or financial entities who invest their finances (capital) into a particular startup idea, business, often for part ownership of the business (equity) in the future – short, medium or long term or profit. Investors – angel investors, venture capitalists, or private equity firms, support startups they believe in even at the idea stage (this is common to angel investors), but they also want to make a return on their investments. The reason is that when the startup scales and begins to make profit, the investors will get their initial money back in form of profit plus an extra slice of ownership.
The importance of investor’s input in a startup can not be overemphasized. Therefore, these ten reasons are why startup founders should get some investors into their businesses:
Table of Contents
The process of evolving an idea into a product or a service requires an immense amount of time, effort, skills but most importantly, capital. Often, a founder needs capital in order to bring the business off the ground and smoothie operations that will help the business scale. Getting funding for your startup will enable you to hire staff, specialists, invest in production costs, marketing, etc., all with the aim of keeping the operations running.
Labour is one of the factors of production, therefore, no business can grow without investing in human labour. Once a startup commences operations, you’ll need skilled people who would bring their knowledge & expertise in the. Getting money from investors can help you in hiring the right people and building a great team. You will be able to afford your team’s salary till your startup starts making money.
After identifying a need for your product or service and having produced these products for your target customers, you’ll need to create awareness about what you offer. Once you get funds for your startup, you will be able to invest money into marketing, which will help create awareness for your brand. Another reason for marketing is for your business to continually stay in the faces of existing customers and acquire new ones. This will also help you compete with other players in the market and you can let the audience know what makes you different and better.
After identifying a need/market for your product or service, and producing some that have been accepted, it is time to produce more products in large quantities to meet those needs. If your target audience likes your product or service, you would want to capture as much market as possible and keep increasing your customer base. Capital is what you will need to expand your startup to this next level.
Investors are often profit oriented and want a proper ROI on their investment in your company. Hence, they help you come up with a proper business plan and financial model. They will bring their vivid experience on the table and help you manage the unforeseen risks that your startup might experience. They will always focus on maximum profit and minimum loss.
Often when Capital is injected into a startup by investors, it’s aim is to get into a bigger market or new territories. This is common to Serie B funding rounds. It means the startup has grown locally and wants to expand beyond its shores into new terrain. For example, Nigerian Fintech company, Flutterwave has expanded into many African countries and other places beyond Africa. Although penetrating the markets involves a lot of cost and expenditure, once penetrated, the new market will bring regular profits; this is why startups with this aim need more investment.
Apart from spreading a particular service into different markets, startups also diversify their services or create new types of products and introduce them into the market. Product or service diversification means your distribution increases and overall turnover increases. This helps the startup receive more customer attention, while the brand receives a tremendous boost as the profitability of the company rises. Capital injection into the startup is usually needed to achieve this. Often the seed round this happens is Series C.
There is a saying that your network is your net worth; bringing investors into your business not only helps grow your network, it invariably improves the worth of your business. This is one of the advantages of having investors. Investors have partners and friends; these people may become investors in your business or customers. Remember, investors have a stake in your business in terms of commitment and would want to have a return in investment, they will want your business to succeed and push you in the right direction and introduce you to the right people. This growth in terms of profit & expansion will translate to an increase in the valuation of your business.
Once a startup starts getting funds especially from credible investors – venture capitalists 7 angel investors, it becomes directly proportional to your visibility in the market and among your competitors. The business will be seen as trustworthy and so, will catch the eye of other investors in the market. This means more money into the business, more seed rounds, thereby causing massive growth of the startup.
One way startups can get stabilized in a new market or industry if having experienced people in the hems of affairs. This is what mentorship does for business owners, since their investors who become mentors already have years of experience as financial matters are concerned. By Investing your business, it means you have direct access to these investors, who will guide you in many things to help the business scale. You”ll learn many things such as legal, accounting, record keeping, etc.
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