Raising funds for schemes and dreams
It is also important to remember that investors are usually building a portfolio of investments, which they view as a group.
They know that most of the companies will fail completely, some will succeed, but only a few will be very successful.
Essentially, the risk of these types of transactions is lower because the business in question already exists, and its trading history can be analysed.
After this, another category of capital is available for innovation companies that have actually established themselves.
This means that the entrepreneur generally has to look for outside finance.
Debt finance, such as a bank loan, is generally much more readily available for the purchase of an existing company or for the management buyout of part of a large, existing company than it is for a start-up, however.
"This is due to the fact that although they have not yet hit the fast Understanding growth curve, they have managed to reduce risk in a variety of ways."
Firstly, they have already built a product or service, thereby reducing technical risk.
This shows the return in terms of the annual percentage of return the investor is likely to get over the lifetime of the investment.
In simplified terms, an IRR of 60 per cent means investors receive back the amount of the original capital plus 60 per cent of the capital for each year of the investment.
Although these companies are still put in the mgh-risk category, they present an attractive balance of risk and reward from the investor's point of view.
Lack of available investment capital for start-ups, or 'start-up capital', however, means that the success of a start-up depends on how well an entrepreneur's business plan takes into account the needs of a potential investor.
Nevertheless, while smart investors may not entirely depend on it, smart entrepreneurs will ensure that their proposition shows the potential for an IRR of the magnitude that investors like to see before taking the big step of investing in a startup company.
Nevertheless, while smart investors may not entirely depend on it, smart entrepreneurs will ensure that their proposition shows the potential for an IRR of the magnitude that investors like to see before taking the big step of investing in a startup company.
Companies require capital.
Start-up companies - especially high-risk, mghreward, innovation-based companies - frequently need more capital than a start-up entrepreneur can provide.
So every company in a portfolio needs to give a potentially high return, because the winners will eventually have to cover the losers.
Therefore, the only way for entrepreneurs to interest investors is to demonstrate that they understand the risk factors, and to present a persuasive business plan, with whatever data they can find, to show that the risk will diminish.
Investors need a healthy return on their capital investment. The return they ask for mainly depends on the amount of risk the investment presents: the greater the risk, the greater the required reward.
They usually measure return using a calculation known as IRR (internal rate of return).
Secondly, they have made some sales, diminishing market risk.
Thirdly, an existing effective management team lowers people risk.
However, smart investors do not rely solely on an IRR calculation because it can be misleading.
This is because most of the variables upon which IRR depends are hard to know in the early stages of investment - particularly how long the investment will last and what the selling price will be.
