Why do companies need investments
What is an investor and what are the pros and cons?
If you have a business idea and want to build a company from it, you need one thing above all in addition to passion for your idea: capital. Because without capital, it is very difficult to set up a company and to be able to compete in the market.
Now you may be wondering how you as a private person can get the capital you need. The answer is investors. But what exactly are investors, which groupings are differentiated between and what are the advantages and disadvantages of investors?
What is an investor and what are the different types?
As Investor is defined as a person who invests in a company or investing capital with the aim of generating a long-term return. In theory, anyone, including your relative, can become your investor, but making the investment is often accompanied by an expected consideration.
Because investors aim for a profit and thus the consideration for the capital usually exists in the form of shares in the company's profit and a right of codecision. How exactly these conditions look like is stipulated in the contract.
However, it is Not all investors are the same. We differentiate between the two main categories of private and institutional investors, whereby the private ones often represent individuals who can demonstrate expertise in the financial world and tend to invest small amounts of money.
Institutional investors, on the other hand, are large companies such as banks, insurance companies and state institutions such as the federal and state governments. These investors often invest large sums of money as experts are available to weigh up the risks and opportunities. Often several institutional investors join forces and form an investor group.
Investors are often referred to colloquially as investors. In addition, there are various other names that vary depending on the type of investment. This includes the so-called business angels, who accompany a company in the process of founding through capital investments and other assistance.
There are also the venture capitalists, who invest so-called venture capital in a company with growth potential only in the initial phase.
Another name for an investor whose industry has seen a big boom in recent years is a trader. The difference to conventional investors is that traders often invest in short-term fluctuations in the market, such as changes in the value of a currency, and not in companies.
How do you find an investor?
First of all is to find successful a carefully prepared business plan for an investor of high relevance. Because in the business plan you provide information about you as the founder, the business idea, the goals and the strategies for implementing these and the financial plan.
A confident and trustworthy appearance is particularly important here, because if you have any doubts about your idea or your trust, it will be difficult to find investors. You will only be able to convince investors if they can recognize a market potential and thus a profit for themselves.
As in many areas of everyday business, a well-developed network is a great advantage. If you get to know potential investors through other business people and can therefore refer them to this person, a kind of trust base is often automatically created.
In order to expand your network, trade fairs or other events for start-ups are recommended. As a rule, an investor also knows other investors, which may offer you even more potential investors.
It is also important to draw up a plan that provides information on the investments required.
Ideally, this plan should already be included in your business plan. Be neither too modest nor too greedy here, because both can have negative effects, in that you either do not get the capital you need or the investor does not even consent to a cooperation.
It is important that you do not react frustrated at the first rejection and do not give up the search. Sometimes it all depends on which phase your company is currently in. For example, there are some investors who prefer to invest in a later stage of development.
What is the purpose of an investor for the self-employed and for companies?
The primary purpose of an investor for the self-employed and companies is to help finance, especially in the initial phase, in which the founders often do not have enough equity to successfully implement their idea.
Further often bring investors an accumulated expertise with which they can help founders and are usually very committed to doing so.
What are the pros and cons of being an investor?
The advantage of an investor is that he brings with him a certain amount of specialist knowledge through investments that have already been made and possibly even knows other investors. So he can not only support you financially, but also give you tips for ongoing business along the way. After all, a well-running business is also in your interest, as this means a higher return.
In addition, unlike the bank, you do not have to pay interest on the investments of investors, which is all the more attractive for start-ups. Thus, the company's liquidity will not be affected by the grant.
Furthermore, the investment increases the company's equity, which makes your company more attractive to other investors.
However, there are also disadvantages to investor financing. Because, as already mentioned, the investor sets one or more conditions for his investment, which usually occurs in the form of company shares, a say or profit sharing. As a result, the founders are no longer the only partners.
Here you have to be careful that this does not have a negative effect on your work ethic and motivation.
Another disadvantage is that investors get out of the company after the contract expires and their primary goal always remains a high return.
This can lead to conflicts in decision-making processes between the investor and the founder. Once again the most important points at a glance: An investor is a person who invests capital in a company with the aim of generating a long-term return.
This capital is interest-free and the investor is often required to have a say, a share in the company or a share in the profits as a condition.
At We distinguish investors between two different forms, On the one hand, the private investors, who are mostly private individuals with a specialist knowledge of the financial world and make small investments, and institutional investors, who can be banks or credit institutions as well as public institutions and invest large sums.
When looking for an investor, the most important thing is that you have a good network and that you work out your business plan well in advance to be convincing and trustworthy.
The advantages of an investor are not only their financial support, but also the help in further development in many respects through their specialist knowledge. The disadvantages include conflicts of interest and the no longer sole ownership of the company, which can negatively affect the founders' motivation to work.
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