If you are trying to decide if you should get investors to start an eCommerce business, here’s the details you need to know:
To begin, let’s clarify an actual “investment” versus being loaned money, because they are not the same thing. A loan is borrowing money. The funds are paid back, with interest, no matter what. For example, an automotive loan; you repay the loan monthly for X-amount of months plus 6% interest. If you don’t pay the loan the bank takes the car and you are totally screwed on every payment you have made, plus you don’t have a car. Whereas an investment is a gamble for the investor. There is absolutely no guarantee that the investor will make money. In fact, he / she may end up losing every penny of their investment. So, are you looking for an investor or are you looking for someone to let you borrow money (loan)?
Everything you need to know about investors for your new online company:
First, no actual investor is going to want to tie up their money in another online store unless the store has something exceptionally unique; for example, My Pillow created a revolutionary pillow that was completely different than anything on the market. So if you have an invention your odds of finding investors is much higher than if your goal is to open an online clothing store.
Second, if you are opening a run-of-the-mill online store the only investors you are going to find will be friends and family… which *sounds* good in theory but I can assure you that it almost always ends poorly and often severs the ties you have with your loved one. It is imperative that you do some soul searching and decide if the person you care about is worth losing over money.
Third, the reason the relationship ends is because they’re NOT a “real investor” and you’re not a professional business owner (unless you actually are a long-time successful biz owner and they literally are an investor… but I assume this isn’t the case otherwise you wouldn’t be reading this post. But the fact that you are reading this post shows you are putting serious thought into the topic and kudos to you for that!)
Because they’re not a “real investor” and you essentially don’t know what you’re doing, again, I am telling you, things WILL go bad. Here’s why:
The first several YEARS will be overall slow and painful because you have to learn the ropes.
You’re going to make a sh*t ton of mistakes. Everybody does.
You’re going to take some losses, possibly even really hard losses.
You’re going to be working around the clock to try to build a business (Yes, you have to BUILD it. It doesn’t build itself.)
You have to figure out what works by learning what doesn’t work; yep, failure is how to learn to succeed. Lots and lots of failure. It’s not fun.
The first 3 - 5 years is when most small businesses fail. The most common reason for failure is running out of money. With that being said, when you are using someone elses money; someone who is not a “real investor”, they have absolutely no understanding of building a business and, rightfully so, they want their money back… and they don’t want to wait 5+ years for you to give it to them. This creates a lot of friction because if the business is slow, on top of some mistakes being made, in addition to you working around the clock for free, it is exceptionally difficult to pay them back right when they want it because the only certainty in business is that the bills are due. When you finally sell a couple things and finally have $50 profit you likely have life expenses you absolutely have to deal with, but the (fake) “investor” wants you to hand that $50 to them… and every $50 after that until they are paid in full. Meanwhile you have no food in your fridge and have been living off crackers and Ramen Noodles for 18 months and gosh darn it, you just want a gallon of milk and to pay the utility bill so your electricity stays on.
Additionally, because they're not a “real investor” they suddenly feel like your business is now their business because they provided you with money. This means they will be constantly telling you what you “should do”, endlessly hammering away at you, “how much sold today? How much of that do I get?” and some even begin major meddling in the company; such as showing up with products they purchased on their own that they *think* are great for the company… but then adding that amount to your debt. Before you know it, the $2,000 you borrowed turns into a $15,000 hole of hellish debt that seems utterly impossible to ever climb out of.
Others will show up to “work”, which is far more of a headache than it’s worth because they will slowly begin to undermine you even though their intentions started out as pure. The problem is they begin to see it as THEIR company because you wouldn’t be in business if it wasn’t for THEIR money… which means they feel they don't have to listen to you. Before you know it, you will dread seeing them and be miserable to go to work even though you own the company and do all of the work, all day and night, every single day.
THE BETTER SOLUTION:
The absolute best solution is to do it all 100% solo. Yes, it will take longer to build but you WILL do it, one dollar at a time and you won’t have the added expense of having to pay someone back every time you make a buck. Start small. Buy what you can afford. Turn $20 into $100 then turn that $100 into $200 and so on. And, if you don’t have $20 then now simply isn’t the time to start a business, you would be far better off waiting a year and saving every penny possible in the meantime.
However, if you absolutely, positively insist on getting an investor (who is friends / family) you MUST use an Investment Contract (they are FREE, so there’s no excuse). You can edit the contract to fit your exact situation. Make sure the repayment terms are very clear and most importantly, you have to stick to them. Make sure your investment contact outlines what happens if the business fails; do you still owe them or is this a risk they are taking? Is this genuinely an investment or is it a loan?
Love this blog post? Read more about starting an online eCommerce store.
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