Not long ago, a well-known distribution company in Mozambique announced the public sale of over three million shares, equivalent to 10% of its shareholder structure. The operation, which would take place under the supervision of the Mozambique Stock Exchange, took some people by surprise who were not accustomed to observing this type of transaction within the Mozambican financial market. However, like in other global markets, these types of operations are nothing more than a routine that companies, big or small, have to follow at a certain point in their life to increase their capital or their “financial muscle.” In fact, any entrepreneur who has a business idea and wants to build a company from that idea usually needs one thing in addition to belief and passion for their idea: financial capital, and consequently, in many cases, one or more investors. Without this capital that investors provide and enable, it is very difficult to start a company and compete in the market.
The above example shows how companies at some point need people who believe in and support their business with funding and make it available so that these companies can move forward, progress, and achieve established goals. In fact, for some entrepreneurs, external investment is the only way to keep their business idea alive. But what exactly are investors, how are they distinguished, and what are their advantages and disadvantages?
Investors
An investor is an individual or organization that gives money to another person or organization in the hope of a return on the invested capital. Theoretically, anyone can be an investor, even if they are a friend or a relative. As long as someone invests money in something, they are an investor; however, making an investment often comes with an expected counterpart. Depending on the type of investment made, the counterparts may consist of shares in the company’s profits, the right to make decisions in the company’s management, among others, and are usually well specified in the contract between the parties.
What different types of investors are there?
As we have seen, investors have the potential to serve as the muscle or life force of a company. The right investor can help propel a startup from its inception to becoming a successful company.
In the startup financial market, there are various designations for investors, which vary according to the type of investment. These include business angels, who accompany a company in the founding process through capital investment and/or other forms of assistance. In addition to them, there are venture capitalists, who invest so-called venture capital in a company with growth potential. In addition to these investors, there are so-called peer-to-peer investors, who can be friends, acquaintances, or unknown individuals who invest in their company indirectly or through specific platforms. In any case, it is important to note that there are distinctions between the types of investors and, for those starting out in business, knowing the differences is essential for when the phase of seeking investments or increasing capital arrives.
Business angels
Business angels or angel investors are usually successful entrepreneurs who want to expand their wealth by investing in projects they believe in, especially startups that may have difficulty accessing more traditional forms of financing. This investment is usually in the form of a loan or a stake in the company, depending on the terms. Sometimes, they also guide or advise the business in which they are investing, considering that many of them have some knowledge in the area or type of business they invest in. In some cases, these “angels” make a high-risk investment in the hope of receiving a large return if the company is bought by a larger company or fund or if it is publicly traded on the stock exchange.
VC’s
Venture capitalists typically invest larger amounts of money into a company in order to secure a stake in the company.. The investment is based on the idea that this increase in social capital will increase in value over time and they will receive a return on their initial investment. This type of investor usually works with companies that have a solid business plan and have already demonstrated some degree of success. Additionally, they rarely invest in startups considered risky. Entrepreneurs who choose this route should be aware that by seeking investment from a venture capitalist, they may be partially giving up control over the company, as VCs will certainly want to have a say in management decisions. For this case, it is important to establish a detailed partnership agreement that outlines the rights and responsibilities of each party.
Peer-to-peer lending
Peer-to-peer lending, also known as social lending, allows entrepreneurs to obtain loans directly from other individuals, eliminating financial institutions as intermediaries. For this type of lending, startups and entrepreneurs can create online profiles for their specific projects on sites to be considered by investors. Potential investors can access the credit history of the proponent. After the investment is approved, it will be necessary to negotiate an interest rate for the investment with the lender, who is usually an individual. It is important to understand the loan terms and avoid delays in payments, as it can harm future loans through these platforms.
How to find investors?
To find the type of investor needed, it is necessary to establish a carefully crafted business plan, indicating relevant information such as the business idea, objectives, and strategies to implement them, as well as a financial plan. It will also be essential to convince investors to perceive the potential of the market that the company presents. It is important at a minimum to establish a network or know digital investment platforms and not give up the search after the first rejection. Sometimes the type of investor to look for will also depend on the stage your company is in. For example, there are some investors who prefer to invest in a more advanced phase of any enterprise, and typically, venture capitalists look for companies that already have some traction in the market, with a minimum viable product and a sales track record.
The advantage of an investor is that they bring a certain level of expertise through investments already made and may even know other investors. . Thus, they can not only support you financially but also give tips and advise you regarding your business. Unlike banks, it is usually not necessary to pay interest on the capital of investors who participate in your social capital, which can be more attractive to startups, which generally cannot generate cash surplus in the first years after their foundation. Additionally, the investment increases the company’s assets, which may make the company more attractive to other investors. However, it should be noted that there are also disadvantages of investor financing because, as previously mentioned, the investor establishes one or more conditions for their investment, which usually materialize in the form of company shares or profit participation. Founders, therefore, are no longer the only shareholders, which can lead to potential conflicts in decision-making processes between the investor and the founder.
