For a high risk venture investor finance may be the only option for an early stage business. However, if the venture is too risky for a conventional loan then there will also be substantial challenges to persuade a business or private investor that they will get their investment back.
Additionally a high risk investor will expect a high return on their money.
So while the cost of a loan may be the interest charged over set period of time, the cost of an investment is likely to be many multiples of the original amount invested.
The decision to go down the investor route is not just yours of course. You have to be able to make a good business case that the business is investible and then find someone to make the investment.
Here are some things to add in to your evaluation before getting started on this.
1 - Time
If there is an immediate opportunity that you are trying to take advantage of, then spending days and weeks on plans and pitches to cynical potential investors may not be the best use of your time.
Trying for investment can be hugely time consuming the chances of gaining investment are significantly reduced if your business not based in London or the south east.
2 - Control
If one of the prime drivers to starting your own business is to take control of your own destiny and free yourself from people telling you what to do, then having an investor around your neck may not be a good choice for you.
Even if the investment is relatively small, you will have a threat of capital withdrawal hanging over you, so you will have to be pretty sure you can work with the investor(s) before any kind of commitment is made.
In particular, small scale angel level investment often comes with a business involvement clause. This can be (in effect) someone buying a job and is fraught with potential complexity and risk.
Beware, in particular, an investment of this kind from friends and family as the emotional ties combined with the money risk can be very problematic.
If you are so confident you feel you can risk money from friends and family - make sure it is at arms length and they are not involved in day-to-day operations.
3 - Valuation
At the early stages of the business the only way the business can be valued is on its potential. This means the risk you may give away too much of the business for too little investment is high.
Worse still is if you get it wrong and find you need additional rounds of investment further down the road.
If you have given away too much at the beginning you may be forced to relinquish overall control of the business.
The argument that it is better to have 30% of something big than 100% of something small or non-existent can be very appealing - especially when someone is waving a wad of cash at you.
However, the risk of ulitmately ending up with nothing is also very high and should be added into the evaluation.
Think about the end at the beginning. In the end, what will you personally get back when the business is sold? Work it out and decide how you will feel as the founder if you only end up getting a minor percentage of the final selling price.
4 - Pride
Pride is not really something that is easy to hang on to when begging for money.
If you have discovered the magic widget that everyone will want as soon as it is released and have a rock solid patent on it and a price point that guarantees at least 50% profit and a scalable component that means buyers keep coming back for more - then you could be in luck.
All you have to do now is prove it.
However, if the proposition falls a little short of this Goldilocks proposition, then be prepared to be quizzed remorselessly if you get that far.
The worst case is you do not get that far and end up doing a humiliating round of 5 - 10 minute pitches to audiences who may or may not have any money.
In an age of reality shows and Dragon's Den it is easy to find yourself falling into the trap of a scatter gun approach on pitching. It is rarely successful, very humiliating and very time taking.
Try instead to target your pitches to investment prospects you have researched beforehand so you know who you are talking to and can adjust the message to suit.
This is still humiliating of course, but much less so and much more likely to succeed.
