When you hear about investment, you probably think millions being dumped in a company or a big IPO where many big names come together and raise millions, even billions as capital for the company. But what about the smaller companies, the ones which don’t need a billion or even a million dollars? Surely, they need investment and capital too, but not that much. How do small businesses and companies raise capital, and for that matter, how can you invest in a small business?
First things first; small businesses don’t require IPOs or even millions in investment, unless you’re looking for something hedonistic for the owners. For this category, a couple hundred thousand are more than enough to keep them on their trajectory towards getting bigger and more successful. As such, they don’t require teams and hordes of investors each holding a million or two. All they need is an influx of money and an investor that gives them creative control over how the small business progresses.
Keep in mind that while big companies do an IPO and gain board members each with a controlling stake, small businesses are unlike that. They don’t need a board to be running efficiently, and they sure as hell don’t want an outsider with money telling them what to do. The role of an investor in a small business is more of a silent partner, one that watches and earns, and lets the company men do as they please, as long as it rakes in money.
Investing in a small business is quite different from investing in stocks of bigger companies. You won’t find shares of the small business, not in NASDAQ at least, which allows the investor to have a chance to personally meet the people behind the company and establish a direct relationship with the people running the small business. Which makes it all the more exciting, to say the least. And if it goes big, you can be sure to earn a hefty amount from the small, nascent company you supported in its earliest days.
Before we get into how you can actually invest in a small business, you need to understand that investment and business finance in general is quite a dynamic industry, one where there is no singular universally acceptable method of doing things. As a rule of thumb, small businesses do not require large chunks of money as investment, but there are always exceptions to this statement. Especially the technological industry, where a good investment is needed before even a small start-up can begin functioning. The same goes for automobile manufacturers, as we’ve seen recently with many new entrants in the electric vehicle industry.
How to Invest in a Small Business
As mentioned beforehand, if your knowledge of investment comes from popular media and movies, you’ll have to rethink that glamorous idea again. Because big businesses require big bucks and by that analogy, small businesses require small bucks. You won’t be transferring millions to the company and receiving millions of stocks in exchange. For small businesses, there might not be such a proposition of going for an IPO and the small business would not like it if you would ask for a controlling position in exchange for the influx of money. So, the game plan has changed a little bit. Let’s understand how you can invest in a small business.
Things to Do Before Investing
You just can’t get right into it, there is a procedure to follow before you can get in and start the investment procedure. Here are a few basic steps that you have to follow to invest in a small business,
- Scout around for a small company to invest in: You just can’t willy-nilly go with a briefcase full of Benjamins and slap down on the counter of a small company and say, ‘Make me an investor’. Where would you even find one? To start, you need to scout for businesses that need investment. It’s not hard to find, but you’ll have to use a proper channel and inquire from several connections about small businesses looking for investment. And many might not be very open to the idea of such a financing deal that loses the owner control over the company. Or they simply don’t see the potential that the business could earn enough money in the near future for the repayments with a fixed interest rate. Any possibility should be expected and be planned ahead for. Keep that in mind.
- Meeting with the principal owners: After you’ve looked into the possibility of investing in a small business that suits your portfolio and checks all the boxes, you will have to meet with the owners of the business to pitch the idea to them. Now, this particular step is a bit misleading, as many seem to think that companies sniff around for investors, regardless of their status as small or big. It sure seems logical that the thirsty look for the well, not the other way around. However, again, understand that many small businesses do not take kindly to the idea of a takeover and might take some time to be convinced for an investment. You will have to change the plan; pitch an idea that involves a loan-like investment with a low interest rate, or promise them that the investor will be a silent partner and will not interfere in the functioning of the company.
- Do your homework; due diligence: Once you’ve pitched the idea for the investment drive, and the principal owners are willing to let you in on the project, you will then need to look over the files; the projections, the earnings, the details and all the stats to understand what the company is, what it stands to be and what can it grow into financially. Do your homework, pay close attention to the numbers and do not hesitate from conducting financial background checks and whatnot to make sure you’re investing your money in the right small business and do not stand to lose your hard-earned money.
- Bargain with the small business: Once you’ve gotten to know the inside-out of the small business and feel like you’re equipped well with the insider-knowledge of the business, you can then go ahead and start the bargaining and negotiating process with the small business owners. Chances are, due to the abject requirement of money from the small business, the owners will accept whatever you put in front of them, but they won’t go down without a fight. To keep things as smooth as possible, offer some middle ground where you both compromise on key things and reach a position where it’s beneficial for both of you. Usually, this tug-of-war is where the control will lie of the small business; whether with the new investor or the company founder. Reach a decision where neither one gets full control but rather a joint decision-making hierarchy is established.
- Closing the deal: Once the negotiation part has been concluded, you can now close the deal and start the paperwork or whatever the requisites are. Congratulations: you now officially have invested into a small business, and will now be a part of the reason why a company was successful or not (let’s hope the latter doesn’t happen).
How to Invest Money Into a Business
Investing money is a big step; you’re parting ways with your hard-earned money and are going to dump it into a company that, for all intents and purposes, can go either south or get you to the millionaire and multi-millionaire league. Really, it depends on how you guide and lead the company, and how much time and effort and of course, money you’re going to put in it. Do all of this and you will have a successful investment portfolio, but be aware that investment and business are a tricky sea to map out.
Several instances are there of people being really careful, really smart with how their money goes into investing in new businesses. People with business acumen and investment gurus end up losing billions over a misfire. The important thing to keep in mind is that whatever you invest in, how much you invest in it and whatever line you choose to take, will not go in vain if you learn from it and apply yourself the next time. There are billionaires who’ve lost more than many people make in a lifetime, and they’re still content, because it taught them priceless things, things they’d be willing to learn for more.