Business Investors

What Are Business Investors?

What does a business investor do? When an entrepreneur is starting up a company, or needs funds in order to expand operations, required capital is offered raised through the process of business investment. Here, business investors provide the necessary funds for the set up or running of an enterprise, and get a share of the profits from the business in return. Business investment is a mutually beneficial process between entrepreneur and business investor. On the one hand the entrepreneur is able to carry out business with the benefits of sufficient funds in hand, and the business investor gets good financial returns on his or her investment.

Naturally, different types of enterprises require different amounts of capital – for instance an industrial plant would need a high business investment, whereas the set up of a home based internet business would not require much start up capital.

Types of Business Investors 

The two main types of business investors entrepreneurs seek funding from are angel investors and venture capitalists. Angel investors are business investors who offer funding to businesses, with the hope of earning a share of the profits that the business makes in the future. The phrase ‘angel investor’ has its roots in the investment of funds in Broadway productions by rich patrons, and now also encompasses those who invest skills or knowledge in a particular business, in addition to capital. 

Generally speaking, angel investors go in for more informal business investment, in start up enterprises and small businesses. They usually invest in businesses they are familiar with, or that are located in their neighbourhood, so that it is easier to keep an eye on their business investment. Many angel investors often support their funding with a personal guarantee, which enhances capital volumes considerably.

Venture capitalists are business investors who provide equity financing to businesses that have a good chance of success, assessing risk against the growth potential of the enterprise while making a decision on business investment. Venture capital refers to the money invested by venture capitalists.

When a business investor has a stake in a particular business, he or she expects certain things in addition to the promise of profits. Effective communication and dissemination of important information among business investors is essential, and a certain degree of consulting with the investor is expected. Some investors demand a stake in the business in exchange for their investment, others ask for the first refusal option when it comes to refinancing. Sometimes investors insist that major decisions be approved by them before being carried out.  

The Difference between Angel Investors and Venture Capitalists

There are several aspects that make the difference between angel investors and venture capitalists. The most fundamental difference is that angel investors are using their own money while investing in business, while venture capitalists organise funds from the pooled resources of other people, and use them for business investment. Usually a venture capitalist will have more funds available for business investment than an angel investor, but even the latter can provide funds running into several million dollars.

Angel investors do not ask for an equity share when they are investing in business, whereas venture capitalists do exchange funds for an equity share. An angel investor often bridges the gap in required funding between the entrepreneur’s own funds and funding from the business investment of venture capitalists.

What Business Investors Are Looking For

How do entrepreneurs attract business investors? It is essential for the operators of a business that is seeking funds to present an attractive picture of their enterprise as a business opportunity. The most fundamental way in which those running businesses invite investment is the creation of a business plan, which shows business investors that the company in question has the skills, knowledge and competence to carry out business successfully. A business plan helps a business investor clearly understand the enterprise he or she is considering investing in, and provides a picture of the likely future of the company. A business plan should give a prospective investor a clear idea of what rewards the investment is likely to generate. It should create confidence in the management of the company, so that investors are willing trust the business with their money.

The Elements of a Business Plan

What should be included in an effective business plan? The basic elements include:

  • An explanation of the perceived need for the products or services that will be offered by the enterprise
  • Advantages offered by the use of those products or services
  • The results of customer research and demand analysis with reference to that particular industry
  • Details about competition
  • Marketing plan
  • Financial plan
  • Long-term goals of the business and details of how they are to be achieved