Starting a business, an entrepreneur often feels an urgent need for an influx of additional cash. He can make up for the financial deficit by issuing a loan at the bank, or he can try to attract investors.
Make the second, as a rule, much more difficult. How to find an investor? What are the nuances of communicating with them? How to determine the chances of the company to get the desired amount of investment?
Investments: what are they?
Before talking about ways to attract investment in a business, we will make a short theoretical digression. We will decide on our conceptual apparatus. What is an investment? What varieties are they represented today?
In modern economic theory, investment is classified based on a variety of criteria. There are three generally accepted in the expert environment: the object of financing, the method of investments, and also the strategy for their implementation.
According to the first criterion, investments are divided into the following types:
- the so-called "real" investments;
- financial investments.
According to the criterion reflecting the method of financing, investments are divided into:
- direct (directive);
- "portfolio".
According to the criterion of the applied strategy, investments are:
- risk-free;
- moderate
- aggressive ("venture").
The most important thing that an entrepreneur should understand: in the modern capitalist world there are practically no “ideological” investors who are ready to just invest in business on the basis of personal sympathy for the project. Too many businessmen, experts say, are somewhat naive. They think: "I’ll find an investor and immediately get settled." But such thoughts are fundamentally wrong. First of all, it will get rich that will be invested in business - these are the laws of capitalism.
Who is the investor?
The subjects of investment in a business can be a variety of groups of individuals and organizations. There are a lot of classification criteria. The generally accepted types of subjects of investment among theoretical economists are as follows:
- Russian state organizations (foundations, government and municipal structures, state enterprises);
- private firms registered in the Russian Federation (LLC, JSC);
- individual citizens of the Russian Federation;
- foreign state organizations;
- private foreign firms;
- individuals who are citizens of other states.
Where to find an investor from among these categories? There are many options. The easiest way is to go over the relevant portals and numerous forums. You can periodically view magazines on economic and business topics. In the texts of materials and interviews that are published there, contacts of various funds regularly provide investment support to entrepreneurs. A fully working way is attending business exhibitions, conferences. Representatives of various organizations often make presentations at them. A regular guest of such meetings is a private investor. You can find the opportunity to chat with him during the "coffee breaks" or after the event. As a rule, such people are very open in communication and easily go on dialogue.
How to find an investor who would consider investment in companies operating in a specific field (in IT technologies, for example) as a priority? In this case, experts advise purchasing industry magazines and attending conferences and seminars where representatives of companies operating in a particular segment speak.
People who are ready to invest in business can act both in a single person and in various formats of consolidation with others.How to find an investor who is guaranteed to be ready to finance a project? The strategy for finding the source of investments will depend on what type of cash receipts we need. In turn, this is determined by the nature of the business, the area in which business is conducted and a number of other factors. Consider these nuances.
Real investment
Real investments are understood as investments in various kinds of assets. This may be the allocation of funds for the purchase of certain resources or the supply of the entrepreneur in ready-made forms. That is, for example, if the business needs processing machines, the investor can make a “real” investment by allocating funds for the purchase of equipment or supplying a partner with ready-made units.
"Ideal" investors in the framework of projects of this type are state funds. Why? According to experts, such organizations tend to keep the progress of investment projects under control. This can be done much easier if the subject of monitoring is a real asset.
The ideal business that has the greatest chance of obtaining such financing is a small or medium-sized enterprise of a manufacturing type (producing goods), which has been present on the market for 3-5 years or more.
How to find a "real" investor? What can cause a person or organization to have an interest in investing in company assets? Experts recommend trying the following tactics:
- show how profit has grown over the years, improved company management strategy;
- make it clear that the owner of the company is an experienced and competent person;
- show that the business is sustainable: there are suppliers, sales are established.
Usually, if the company is profitable, and the market is large enough, there are no problems with finding an investor willing to invest in the "real" assets of the entrepreneur.
Financial investment
Under financial investments cash inflows into shares, shares and other types of securities issued by the company (or its structures in the form of joint-stock companies, foreign legal entities, offshore companies, etc.) are understood.
The ideal investors in this type of investment are private (Russian and foreign) funds. Why? Unlike state-owned companies, which are very conservative in the speculative component of the business, private business fully tolerates serious injections into the securities of enterprises.
The ideal type of company for this type of investment is a large, federal or international organization that has been operating for 5 years or more. Finding an investor for a small business as part of such a strategy will be problematic. Most likely, the general level of capitalization of the company is not enough to service the turnover of shares.
How to interest a financial investor? Experts offer the following options:
- show that the shares of the firm are resistant to industry crisis trends (against the background of securities of competing firms);
- talk about other investors who have successfully invested in the company;
- to convince a person considering the possibility of pouring financial flow into the business of the business model performance.
People and organizations that are well versed in financial markets most often operate in large cities. Therefore, the greatest likelihood of meeting with such entities and in the person of any of them to find an investor is in St. Petersburg, Moscow, Kazan and other major financial centers.
Direct investments
Direct investments are understood as cash injections, the object of which is the authorized capital of business entities. As a rule, we are talking about the purchase by a financial investor of a controlling stake, a leading stake, etc. If, say, citizen Ivanov says: “I bought Petrov’s business,” this means that he made a direct investment in the business.
Such acquisitions, in the theory of some economists, are often of a political nature (that is, they are often aimed not at making profit, but also at increasing influence in certain areas at the level of a municipality, district, or even country). Often, experts say, direct investments are financially unprofitable.
An ideal investor: an influential person or organization, an oligarch, a major political figure (can be either a citizen of the Russian Federation or a foreigner). Why? The indicated subjects of the business arena are ready for the fact that the potential investment object will not be profitable; they see in it a source of increasing its significance in certain areas.
An ideal business: a city-forming enterprise, an IT project of a federal or international scale (for example, a social network, an antivirus company with a powerful product, etc.).
How to find investors for business, ready, like citizen Ivanov, to buy it? The most remarkable thing is that, most likely, in this case it will not be necessary to do this. If the project is worth the investment, the investor will come by himself. So many experts believe, and this, perhaps, we can agree.
Portfolio investment
When citizen Ivanov says: “I invested in Petrov’s business” (which looks quite contrasted with his previous “statement”), this means that he made portfolio investments. Such operations mean the transfer of funds in favor of business assets with the subsequent goal of generating income upon growth of capitalization (company revenue).
Example. Petrov’s firm has a capitalization of 1 million rubles. Citizen Ivanov came and offered the businessman a deal. Petrov’s company receives 200 thousand rubles of investments in exchange for a 20 percent stake in the company. The entrepreneur agrees. The business is successful, and in a year Petrova’s company grows to 2 million rubles. Ivanov, as we recall, having invested 200 thousand, received a share in it in the amount of 20%. Which is now equal to 400 thousand rubles.
An interesting question regarding portfolio investment consists in the following: how to determine the very share that the entrepreneur cedes to the investor? There is no definite answer to it, but experienced experts recommend that you be guided by the following principles:
- in any case, retain a controlling stake;
- in the presence of patents and copyrights - do not concede them in exchange for a minimum share of the investor (since this is the most important asset);
- give back the percentage of ownership of the business, evaluating the probable volume of subsequent rounds of investments (if any other investors are in the future, an “equity” share should also be allocated for them).
Risk-free investment
This kind of investment is aimed at generating a virtually guaranteed profit (usually small). This type of investment is comparable (and for the most part very similar) to a bank deposit, when a depositor, having invested money for a certain period, returns them with interest. Legally, relations between an investor and entrepreneurs in the framework of transactions of this type are drawn up, as a rule, in the form of loan or bond purchase agreements.
What is the ideal subject of risk-free investment? This is a state fund, a large corporation. Why? For those and for others, stability is very important. Profitability is in second place.
Ideal business: a large public or private corporation with a very large capitalization (which allows servicing bonds and loans).
How to interest an investor? Experts believe that this is possible:
- extremely transparently publishing financial statements;
- showing actual performance (market coverage, ratings, etc.);
- convince the sustainability of the business model.
Moderate investment
The main criterion here is the guaranteed absence of investor losses, regardless of how the business goes, but subject to a sufficiently high probability of generating more profit than with the first type of strategy.
Example. Ivanov tells Petrov that he is ready to invest in his business. The conditions are as follows: the contract is valid for three years, and if during this time the company grows, the investor will receive a profit in proportion to the increase in capitalization. If the business goes into minus - the entrepreneur returns the amount of investments without profit. Suppose Ivanov invested 1 million rubles, while Petrov’s company had a capitalization of 10 million. Option one: three years later, the company grew to 15 million. Ivanov will thus receive 1.5 million rubles. Option two: in three years the company
Petrova loses 30% in capitalization. Ivanov, in accordance with the contract, receives the invested 1 million back without any surcharges. Legally, the relationship between the entrepreneur and the investor can be issued in the form of an option agreement for the sale of shares. That is, Ivanov, at the time of signing the agreement with Petrov, buys securities from him and receives an option - the right to sell them - at the price that will be in three years.
This strategy helps very well in resolving the issue of "how to find an investor for production." As a rule, expanding the capacity of a factory or factory means that the entrepreneur has found some new markets. Therefore, it is highly likely that the subject of investments wishes to finance an increase in the output of goods for which an increase in demand is expected. Due to similar patterns, using this strategy, you can find an investor for the construction. Which, having seen the prospects of developing new markets, may decide to finance the construction of new, commercially sought-after facilities.
Ideal investors: private foundations, individuals (Russians and foreigners).
Ideal business: a small and medium-sized enterprise, a service company, a catering facility, leading the market for 1-2 years or more.
How to attract an investor? According to experts, proceed as follows:
- show the dynamics of profit growth and, no less important, in combination with the value of costs;
- make it clear how the business model works, how stable it is;
- show that nothing prevents the company from developing (the sales market is large enough, there are no crisis trends, etc.).
Venture investment
This type of investment involves the greatest risks for the investor, but it contains the likelihood of a very large profit. Relations between the entrepreneur and the investing entity allow 100% loss based on business results. However, the investor’s profit may amount to hundreds or even thousands of percent.
Example. Petrov developed a technology for the production of wear socks using nanotechnology and suggested Ivanov to invest 10 million rubles. in their industrial production. He agreed. Under an agreement between a businessman and an investor, the second received 80% of the company’s shares and retained this share regardless of the success of the company.
Option one: Petrov's innovative socks began to be bought by the whole world. Over three years, the company's capitalization has grown to $ 10 billion. 8 of which now belong to Ivanov. Option Two: Petrov’s innovative socks were unclaimed. The loss of the company amounted to 7 million rubles. As a result, Ivanov remains the owner of a share estimated at 80% of the remaining capital of the company, that is, assets worth 2.4 million, and has no complaints against Petrov.
Of course, the story described above is more of a fantasy than a reality. The venture capital market is a place where finding investors for a business is incredibly difficult. As a rule, funds and individuals who prefer an aggressive investment strategy choose 1-2 entrepreneurial projects out of 100. Having picked up 10-15, they expect (and, as many experts believe, not without reason) bankruptcy of 7-8 of them, that is, more half. And only due to the success of other companies, they recoup expenses and profit.
An ideal business for this type of investment: a startup, a small organization that has just entered the market or is just about to do so. Venture strategy is one of the best ways to find an investor for starting a business, despite the difficulties described above. The main thing here is not to stop searching, to offer, to act. And then the company will have a chance to get into those same 1-2 "elite" percent.
Perfect venture investors: private organizations (including those that specialize in this type of investment), individuals. Interestingly, this may also be some state funds. In particular, those aimed at supporting innovation. Thus, state structures are gradually becoming the place where it is quite possible to find an investor even for a novice entrepreneur.
How to attract financing? Experts advise the following tactics:
- tell the investor in detail about the target market, about who will definitely buy an innovative product;
- make it clear why the product or service being promoted is better than solutions from competitors;
- talk about the success of promoting a similar product (if such precedents exist) in other markets.
We attract investments: tools
How is the interaction between entrepreneurs and investors in practice? Experts identify the following basic mechanisms.
1. Personal communication with the investor
Most funds have offices, and with them, structures responsible for the “personal welcome” of entrepreneurs, where experts sit and evaluate the prospects of businesses whose owners come in search of investments. Many economists recognize this method of finding investors as one of the most effective. At least due to the fact that the proposal will be guaranteed to be considered. If an entrepreneur chooses a strategy for personal visits to funds, then for a while it is better to move to a large city where there are many such organizations (if he does not live in such a settlement). Finding an investor in Moscow is much easier than in remote regions.
2. Remote communication (correspondence, phone calls, Skype)
As a rule, this method of interaction is relevant for cases when the entrepreneur lives in one country and the investor in another (or they are separated by significant distances). One of the advantages of this method is the ability to interact with several funds from different states and cities at once. You can solve the problem of how to find an investor in Moscow, and at the same time communicate with companies from the USA and Singapore. The chances of attracting funding in this case are significantly growing.
3. Public appeals of the entrepreneur
There is an option in which a businessman does not visit any particular structure, but addresses the entire business community. The main "platform" where it will be easiest to find a private investor will be the company’s website, its founder’s personal blog or its page on the social network. The most popular method of interacting with the public is crowdfunding, in which absolutely anyone can invest in the business.
You can attract investors through several channels at once. Today, this is a common practice for businessmen (especially for startups). The main thing is not to back down, convince yourself: "I will find an investor." Unlike banks that either give credit or not (and after that some time must pass before the next appeal), people who decide to invest in someone else’s business can change their minds.
By refusing the entrepreneur today, the investor may well change his mind and give consent tomorrow. This nuance, experts believe, is one of the key in building a successful strategy to raise funds in a business. You should not think only about how to find a private investor. As we said above, interested state structures are also found in the modern capitalist space.
