It’s a hard choice faced by many entrepreneurs: Should I give up a piece of my company in exchange for an investment to accelerate its growth?
Your decision will depend on what kind of a business you are running and your ambitions for it. It will also depend on your prospects for success—will an investor want to take a risk on you?
Investors want to see a path to strong growth that will allow them to earn a substantial return on their capital, says BDC Communitech Partner Ryan McCartney.
“Investors are going to get a return by raising the valuation of the company and bringing in more money, either through new investments or the sale of the company,” says McCartney, who works with tech start-ups and scale-ups in Kitchener, Ontario. “Among other factors, the valuation is significantly tied to your growth rate.”
Even in a traditional bricks-and-mortar business, investors will want to see a good growth rate and path to profitability that will lead to dividends for them and increase the value of the business over time.
As an entrepreneur, there are a lot of financial and non-financial factors to weigh when considering an investment versus other financing options.
Pros and cons of debt and equity
- Can fuel rapid growth and scale up
- Patient capital that can fund early product development and sales
- No negative impact on cash flow
- Access to network and expertise to help growth
- No ownership dilution
- No interference in day-to-day management
- Potentially lower cost than equity investment
- Interest payments are tax deductible
- Short and long term options
- Ownership dilution
- New partners may want a say in decisions
- Higher cost than debt
- Typically requires additional reporting and governance. (This can also be seen as a pro.)
- Repayment terms can interfere with rapid growth
- Often requires collateral