Investor money vs natural growth vs bank's money?

[Lord Business]

I'm sorry if I'm creating a thread that has already been done - I couldn't find one, although I found some conversation about this subject in different threads, but a little too superficial for me to get enough information.

I'm looking for perspectives and thoughts on the ancient question: is it better to grow naturally and slowly or with investor money and quicker and what are the most important circumstances about it.

For example:
Business X:
Case 1: natural
Online service business 2 years old, all natural
Ownership 50%-50% between 2 founders
1st year sales 30 000, 2nd year sales 50000, projected sales for 3rd year 80000, so we could figure that it will probably be roughly 60% a year growth naturally.
Profit margins in 20s.
Companies expected net worth in 5 years time: ~900k
Case 2: With investor money lets say business gets external investment for 150k for 33% equity (just a random example, don't get caught in the number), so its 33-33-33 at the end of the 2nd year. 150k would then be theoretically equal to next 5 years natural growth profit (roughly). Let's assume that instead of 60% growth the sales will grow 80% with the investment money (random number also)
Ownership 33%-33%-33%
3rd year sales 90000, 4th year 162000 etc
Profit margins same - 20s
Companies expected net worth in 5 years time: 1,7 mln
Case 3: With bank loan lets say there's a third option: bank loan for 75k and that would lead to sales growing 70% instead of 60%, but with the loan being paid back hinders gowth a little, lets say 3%
Ownership 50%-50% between 2 founders
3rd year sales 83500, 4th year 139000 etc
Profit margins same - 20s
Companies expected net worth in 5 years time: 1,169 mln

In those cases founders net worth would be after 5 years (starting from the end of the 2nd year):
Case 1: 450k
Case 2: 567k
Case 3: 585k
But those are just the random calculations and there is lot more to take into account.
Case 1:

• the product develops slowly, through constant feedback-improve loop
• cash is always tight - strategic decisions tend to be on the cautionary side
• no-one on the outside to be responsible to, 100% freedom in choices
• many opportunities go by because risk threshold of taking them on is too high

Case 2:

• investor could possibly offer help more than just the money injection
• founder's shares drop 33% in amount
• responsibility to the investor
• risk threshold lower - more opportunities to take on different projects but also fail in them

Case 3:

• no strategic help from bank
• ownership is not changed
• responsibility to pay back loan
• harder to get investments down the road, because of the dept
• risk threshold still on the higher side, although money is not that tight

This is a oversimplified viewpoint of a noob, who doesn't have any real experience. What do you think? What are the considerations to take into account?
Cheers!

 

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[Burning Desire]

Take Equity funding if you think (1) the valuation is attractive and (2) the investor can also bring commercial input into the business.

Bank debt can be REALLY accretive to you as a shareholder, but you need to make sure you understand how to manage a relationship with a corporate lender. I.e. this will take inputs like regular updates, budget reviews etc.

 

[JM35]

You're not getting a bank loan for a business that small without pledging personal collateral. And at that point, you might as well use that capital to invest in your business. Any your rate on a $75K loan to a business doing that in sales would be 20%+ if you could even find anyone interested. Would likely have to be a private loan.

This is why venture capital is the goal of every small start-up with funding needs.

 

[Lord Business]

You're not getting a bank loan for a business that small without pledging personal collateral. And at that point, you might as well use that capital to invest in your business. Any your rate on a $75K loan to a business doing that in sales would be 20%+ if you could even find anyone interested. Would likely have to be a private loan.

This is why venture capital is the goal of every small start-up with funding needs.

Thanks! Yeah, I mainly meant personally pledging loan and smaller interest rates. So you'd prefer selling ownership?

 

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[WJS]

I'm sorry if I'm creating a thread that has already been done - I couldn't find one, although I found some conversation about this subject in different threads, but a little too superficial for me to get enough information.

I'm looking for perspectives and thoughts on the ancient question: is it better to grow naturally and slowly or with investor money and quicker and what are the most important circumstances about it.

For example:
Business X:
Case 1: natural
Online service business 2 years old, all natural
Ownership 50%-50% between 2 founders
1st year sales 30 000, 2nd year sales 50000, projected sales for 3rd year 80000, so we could figure that it will probably be roughly 60% a year growth naturally.
Profit margins in 20s.
Companies expected net worth in 5 years time: ~900k
Case 2: With investor money lets say business gets external investment for 150k for 33% equity (just a random example, don't get caught in the number), so its 33-33-33 at the end of the 2nd year. 150k would then be theoretically equal to next 5 years natural growth profit (roughly). Let's assume that instead of 60% growth the sales will grow 80% with the investment money (random number also)
Ownership 33%-33%-33%
3rd year sales 90000, 4th year 162000 etc
Profit margins same - 20s
Companies expected net worth in 5 years time: 1,7 mln
Case 3: With bank loan lets say there's a third option: bank loan for 75k and that would lead to sales growing 70% instead of 60%, but with the loan being paid back hinders gowth a little, lets say 3%
Ownership 50%-50% between 2 founders
3rd year sales 83500, 4th year 139000 etc
Profit margins same - 20s
Companies expected net worth in 5 years time: 1,169 mln

In those cases founders net worth would be after 5 years (starting from the end of the 2nd year):
Case 1: 450k
Case 2: 567k
Case 3: 585k
But those are just the random calculations and there is lot more to take into account.
Case 1:

• the product develops slowly, through constant feedback-improve loop
• cash is always tight - strategic decisions tend to be on the cautionary side
• no-one on the outside to be responsible to, 100% freedom in choices
• many opportunities go by because risk threshold of taking them on is too high

Case 2:

• investor could possibly offer help more than just the money injection
• founder's shares drop 33% in amount
• responsibility to the investor
• risk threshold lower - more opportunities to take on different projects but also fail in them

Case 3:

• no strategic help from bank
• ownership is not changed
• responsibility to pay back loan
• harder to get investments down the road, because of the dept
• risk threshold still on the higher side, although money is not that tight

This is a oversimplified viewpoint of a noob, who doesn't have any real experience. What do you think? What are the considerations to take into account?
Cheers!

My personal view is this: it depends on the individual’s personality, risk appetite and desired outcome. There’s no definitive answer to this question.

Let me touch on the desired outcome first. Do you plan to sell the business after it is established? Or do you plan to keep it as a cash cow? Answer this first as it will affect your approach.

Case 1: The organic way of building a business.
As you have mentioned, cash will be tight, and growth will be slow. It is both good and bad. It makes you consider each step carefully before you make them, thus avoiding overexpansion and having the business blows up on your face. It also forces you to be creative and resourceful, while maintaining 100% control of your business.

Case 2: Investor’s money.
With the right investor, you can get synergy and really expand the business quickly as they can share their expertise and their extensive network with you. However bear in mind that when there’s people, there’s bound to be conflict. Once you give up part of the equity the investor has the right to interfere with your business and do things that you don’t agree. Steve Jobs was kicked out of the company that he founded. Something to think about.

Case 3: Bank loan
A bank loan is like a double edged sword. It is great for you if your ideas work well. It propels you to the next level while maintaining control. BUT, if your ideas don’t work, you’ll be stuck, and might end up being bankrupt (worst case scenario). Can you handle the risk?

Like I said, it really depends the individual’s personality, risk appetite and desired outcome. All roads lead to Rome. Perhaps you could start off with organic growth, and when business starts to pick up, get investors and/or apply for bank loan.

 

[Lord Business]

My personal view is this: it depends on the individual’s personality, risk appetite and desired outcome. There’s no definitive answer to this question.

Let me touch on the desired outcome first. Do you plan to sell the business after it is established? Or do you plan to keep it as a cash cow? Answer this first as it will affect your approach.

Case 1: The organic way of building a business.
As you have mentioned, cash will be tight, and growth will be slow. It is both good and bad. It makes you consider each step carefully before you make them, thus avoiding overexpansion and having the business blows up on your face. It also forces you to be creative and resourceful, while maintaining 100% control of your business.

Case 2: Investor’s money.
With the right investor, you can get synergy and really expand the business quickly as they can share their expertise and their extensive network with you. However bear in mind that when there’s people, there’s bound to be conflict. Once you give up part of the equity the investor has the right to interfere with your business and do things that you don’t agree. Steve Jobs was kicked out of the company that he founded. Something to think about.

Case 3: Bank loan
A bank loan is like a double edged sword. It is great for you if your ideas work well. It propels you to the next level while maintaining control. BUT, if your ideas don’t work, you’ll be stuck, and might end up being bankrupt (worst case scenario). Can you handle the risk?

Like I said, it really depends the individual’s personality, risk appetite and desired outcome. All roads lead to Rome. Perhaps you could start off with organic growth, and when business starts to pick up, get investors and/or apply for bank loan.

Epic answer, thank you!
Totally agree on every point.
IF I'd take investor money, I wouldn't give up majority shares if I didn't have a very very strong reason for it. I've also read too many scary tales about those situations.

Do you think that it's necessary to know right from the start if you want to sell the company or keep it? (to make the right decisions)

 

[WJS]

Do you think that it's necessary to know right from the start if you want to sell the company or keep it? (to make the right decisions)

In my humble opinion, it’s not a must, but it would be good for you to decide from the very beginning. The approach would be completely different. If you plan to build a business for sale, the investor route would be more ideal. You can get them to come in and quickly build up all the necessary systems. Once done, you sell it, make a handsome profit and move on to the next target. But if you want to build the business for your own cash flow, you can choose to do it slowly and build it up, so that your customers will remain loyal to you due to the long term relationships built over the years.

In the end of the day, it’s just a matter of approach. There’s no right or wrong here.

 

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