The reluctance to let go of control can be a barrier to the growth of many businesses.
All the answers to your unique business lifestage questions
Becoming a successful entrepreneur means investing time in a business and using your passion and talent to achieve your dreams.
It is no wonder that many business owners find it difficult to consider bringing in investors and giving away part of their businesses when cash is required to expand and grow into new markets.
“Rather than losing control of his or her business, the entrepreneur will often make an emotional decision that could limit opportunities for growth. This will result in the business losing a competitive edge against its rivals,” says Ravi Govender, Head of Small Enterprises at Standard Bank, when highlighting the issue of ‘control versus scale’ featured in the second episode of the Standard Bank 'Think Big - Building Business Champions' show.
Reality and the desire to fulfil a dream will often dictate whether an entrepreneur will take the next step and seek out potential investors or new partners.
Mr Govender says “If the process is well considered the right investor and channel of finance can be found. Handled correctly, business owners can achieve a balance that enables them to still oversee the business and enjoy the benefits that come with advancing the enterprise into a new era.”
The two things to consider are where funds for growth can be sourced, and what type of investor you would like to invite into the business. The most common methods of raising capital are:
Debt financing by taking on a bank or private loan
- The advantage of a loan is that it allows you to maintain control.
- The major disadvantage is that the loan must be repaid with interest, reducing future capital availability.
Selling equity (shares) in the business - a long-term solution for growing the company
- Instead of spending money on loan interest payments, the cash from equity investors can be used to grow the business. In addition, this reduces your personal business risk.
- In many cases the investors can add skills and experience to the business.
Seeking venture capital from an organisation that specialises in investing in various growth industries
- The benefit is that these specialists can bring skills to the company.
- The negative is that they often seek to exert control.
Angel investors are people who focus their investments on sectors in which they have a personal interest
- The equity arrangement with an angel investor is similar to that of a venture capitalist.
An Initial Public Offerings (IPO) becomes viable when the company is growing rapidly and has reached a stage where it may be possible to offer shares to the public.
- This is highly regulated stock exchange activity that requires advice from financial and legal experts.
Once the entrepreneur has decided that a potential investor should be brought in to help grow the business, there are several factors to consider:
- Whether the investor can add real value to your business.
- Whether the potential investor knows anything about your business sector.
- How committed the individual or investment firm is to your business.
- If the individual or business investor has a track record of success.
- How much capital will be allocated or reserved for your company.
“It is almost inevitable that a successful entrepreneur will be faced with the question of how best to take his or her business to the next level. The choice is often between growth and stagnation. Taking the correct decision means taking time and, if necessary, getting the expert advice required to make the right choices,” says Mr Govender.
Think Big offers the winner an opportunity to inject R1 million into their already successful small business, as well as advice from leading South African business personalities on the issues and factors that hold a business back from achieving its full potential.
Think Big episodes can be viewed on SABC 3 at 9:30 pm every Thursday evening. The show is repeated at 4:00pm on the Sunday following the evening broadcast. You can also log on at www.standardbank.co.za/bizconnect to view the show.