Investors don’t want the best companies, they want great companies with outsized growth potential. If you’re lucky enough to have a great company with big growth prospects and investors still clamor for your business’s sale then it must mean that your company is amazing? Not necessarily. There are plenty of other factors in play when deciding if someone will invest their money into an enterprise or not.,
The “why startup fails” is a myth that investors want the best companies. This myth has been debunked by many sources, with one being that it’s actually the opposite. Investors want to invest in companies that are on their way up, not ones that have already reached success.
As I begin my business plan marathon season and my angel investment group begins to look seriously at a slew of new businesses, I keep running into a few recurring misconceptions. This is the first item on my to-do list. It’s not an April Fool’s Day prank, by the way.
The best businesses for outside investment are those that can develop quickly and then be purchased by a bigger firm for a much greater price, allowing the investors to recoup their investment.
While there are exceptions, the majority of effective investments must be scalable. Is it possible to go from selling ten to one hundred to one thousand to ten thousand without a commensurate increase in headcount and overhead? Product-based enterprises may generally do so. Some web service companies are capable of doing so. However, many firms are unable to do so.
This is why service firms are often disliked by investors. They are more reliant on people than on the goods. Every night, key assets leave the building. They are unable to expand.
This is why investors dislike firms that can self-fund and develop indefinitely without requiring outside capital. Angel investors and venture capitalists do not want to invest in reliable firms for the long run. They don’t want to rely on dividends to make ends meet. They want enterprises that can grow quickly and then be sold to someone else.
One situation that entrepreneurs and founders like, but investors despise, is owning a minority stake in a strong independent firm that can develop indefinitely without requiring large sums of money from others. These businesses may have contented owners and healthy financials, yet they have no desire to sell.
Exit strategy is a popular term. The exit occurs when the investors get a return on their initial investment. Going public used to be the definition of exit, which meant obtaining officially authorized and registered to sell the company’s shares on the stock market. Although it is still possible to go public these days, it is quite unusual. As a result, exiting entails being bought out by a larger corporation.
This suggests that your company may be a good one, but it isn’t a good investment. That’s a rather regular occurrence. I’ve been there, and I’m glad I did since we ended up bootstrapping a company with 40+ workers, multimillion-dollar revenues, no debt, and full ownership. However, you should be aware of this and direct your expansion finance initiatives elsewhere.
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The “how to find investors” is a startup myth that has been around for a while. Entrepreneurs are advised to go through their network of friends and family, as well as local business owners, in order to find investors.
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