Is your business even suitable for investment?
Using OPM (other peoples' money) to grow your business is a powerful and effective growth strategy. But it is essential to first determine if your business if even suitable for investment.
Let's explore this together by getting clear on a few of the fundamentals.
First, let us begin by understanding investors. They typically do the following:
- Invest in a business in exchange for equity or a shareholding.
- Ideally want to invest for 3-10 years
- Expect to make a high return on their investment when they exit (10x their initial investment is usually a good return, in their eyes).
That said, investors do not find all of the above in every business, so not all businesses are suitable for investment.
TYPES OF BUSINESSES
Broadly speaking, there are 5 types of businesses. Let’s take a look at each type to see how suitable, or not, they are for investment.
The 5 types are:
- This type of business relies on the individual entrepreneur’s time and efforts, so its growth is limited by those two factors.
- Examples include freelancers, individual consultants, and hobby-hustles
Suitability for investment - Whilst these are great lifestyle businesses, they are not suitable for external investors.
2. Small business:
- Similar to self-employed businesses, they rely on the entrepreneur to perform
- They often have a linear growth meaning that if they are to increase revenue by 10%, then the costs will also have to increase by 10%
- Examples include grocery stores, small farms, and lodges/bed & breakfast establishments, etc.
Suitability for investment - Although these are bigger businesses than self-employed businesses, they are still not suitable for external investment.
3. Scalable business:
- Scalable businesses do not rely on the individual and entrepreneur’s efforts to grow
- The revenue can grow at a faster rate than small businesses or self-employed businesses, without significantly increasing costs
- They can be small but have highly replicable business models, with potential for exponential growth, e.g. 100x
- Examples include businesses that use technology to distribute their products or services, franchise models, agent models, etc.
Suitability for investments - these are suitable for venture capital investments because they have the potential to deliver attractive returns to the investor.
4. Corporate businesses:
- These are usually large, stable, and systemise businesses
- Examples include mobile network operators, big banks, etc.
Suitability for investments - Although they are large, stable companies, their periods of high growth are now behind them. So, they are not attractive targets for investors.
5. Not-for-profit organisations:
- These organisations might be community-based or community focused, and usually provide solutions that helps societies.
- They’re not focused on profits and they don’t charge the end customer because they’re usually there to solve a problem for society at large.
Suitability for investment – space all these large organisations of all these can be large organisations they are not attractive investment targets because they are usually not very scalable and they are not for profIt.
If you are reading this, then you are unlikely to already be a large corporation so your business or idea probably falls under one of the other four types; self employed, small business, scalable business, or not-for-profit.
If your business is not scalable, but you need some investment then you have two choices:
1) See if it is possible to turn your business into a scalable business, or
2) If your business cannot be turned into a scalable business, then look at alternative investment opportunities for your type of business specifically.
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