3 Major Pros and Cons of having Investors in your Start Up

Sameer Gudhate

Oct 05th, 2016

The base idea of a start-up is the concern towards others. Start-up India campaign is designed at promoting bank financing for start-up ventures to boost entrepreneurship and support start-ups with jobs creation. The initiative is a very motivating thing, which will bring forward the power of India’s start-up ecosystem. The initiative would be supporting the capacity and ability of Indians to innovate and solve the unique problems that we face in our country.

A very large number of people are opening up their start-ups or are joining existing start-ups after completion of their studies. The number of start-ups is growing at an alarming rate, and there will be a systematic progress in this trend. A study across the nation says that generally start-ups are founded by student’s right after college or young professionals. Unfortunately, most founders typically sacrifice their career, earnings, personal life, and professional aspirations to create something exceptional.

Possibly, the major challenge to convert that idea into a profitable venture is the cash needed. Cash is the lifeline for any enterprise. Every business needs to meet their expenses- routine or ad-hoc and to do that, cash is required. Every start-up needs to meet their expenses- routine or ad-hoc and to do that, cash is required. One of the most important reasons why start-up often fails is normally due to lack of cash flow. Indian start-ups are very different from their western counterparts.

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Statistics shows that a vast number of western start-ups commence with funding from friends and family, whereas Indian start-ups get money from external investors. Having an investor can help overcome this hitch. However, having investors is not necessarily all positives and benefits. Let’s discuss the pros and cons...

#Pro1: Its is not a Loan

If the start-up goes in for a bank loan, the bank certainly expects that the start-up to pay them back. They are least concerned if the venture is a success or a failure. The start-up is without fail required to pay the EMI on the specific date. An external investor operates with a different mindset altogether. The money is pumped in to get the start-up going and running. In return,the investor gets an ownership in the venture. Once the start-up starts running well, both the start-up and the investor are benefited out of it. If, on the other hand, the start-up fails, the investor doesn’t expect to be repaid for the sum invested. 

#Pro2: Investors are Risks takers

An external investor for any start-up, for most of the time is an established entrepreneur. He understands the amount of risk implicated and most probably is comfortable in taking it. Going even for a small bank loan is not an easy task. And even if any bank agrees for a funding, they certainly would limit themselves in the lending amount, as for them the risk involved in of greater depth. Investors, on the other hand, believe in the base idea and the team on which the venture stands. If the investors don’t believe in the idea but still are interested in funding, they don’t make a large investment.

#Pro3: Increase of Success Chance

Investors are people who along with the investment also bring in a lot of experience as they at one point of time have gone through the same process of starting something new. As a matter of fact, Harvard Business School have found out that if funded by an investor, the start –up is much likely to survive and stay in business, have a considerable growth path and expect greater profitability. A start-up is benefited twice as it also gets a lot of knowledge, advice and guidance apart from the investment.

#Con1: They come with Strings Attached

A start-up is theoretically is not bound to repay the investor which he has invested. But, there is a catch to it. When the investment comes in, it is that the start-up is parting up with the equity, which is like parting away from the future net earnings. The percentage of equity offered to the investor directly depends on the investment made. If the start-up idea clicks big time in the market and succeeds in making a profit, a lot of money is to be parted with the investor.

#Con2: Setting Higher Standards

The biggest risk in having an external investor is that the investor can have higher expectations. The more the risk for him, higher would be his expectations. Another reason why he invests is because he probably sees his investment as an instrument to make more money. In that case, he certainly wants to see his payoff coming soon. As a matter of fact, most of the investors expect to make 10 times of his invested amount in the first 5 or max 7 years. The delivery pressure in this case, is very much high and can seriously affect the mindset and working of the start-up.

#Con3: Some Control Lost

When the investment comes in, it also comes in with a deep interest on how the money is going to be used. The start-up may be not aware of it. Also, it is quite possible that the investor wants to play an active role in each of the business decision. If the investor is not involved in the day to day running, the founders are still liable for explanations of reasoning on the decisions taken.

There might be definitely many other pros and cons for working with an external investor, but we can summarize certainly like this: the much-needed cash to get the start-up get going is certainly received, but also there is a risk in losing the control on the start-up by the founders. A word of caution is certainly looking at the business plan vigilantly and then decides if an external investor suits the start-up.