Is Investment Ethical?

So, you have a great business idea or maybe you’ve designed a fabulous product that you can’t wait to get to market. If you, like us, are also committed to making your business as sustainable and ethical as possible you probably have a vision for this, or may even have a purpose beyond profit. Yet, to get your business off the ground, you’re going to need some investment. Now, every business is different and some lucky ones require less start-up capital, whereas others demand a lot. This will also be dependant upon how quickly you intend to grow. For example, if you’re going to carry on working full time initially, you’re going to have to accept slower growth but then you can build your operations in steady stages, thereby spreading the cost. However, if you’re looking to launch and scale-up quickly then it’s probably going to cost more and you may be in need of investment. The question is, is investment ethical?

First, let’s consider our options. You may be in the position to be able to self-fund your business and thereby only your own capital is at risk which, on the surface, seems fair enough. Yet, few of us have the cash flow to enable this. In more recent years crowdfunding has become a popular way of raising funds. With crowdfunding, you’re not giving away parts of your business or having to borrow money. Instead, you are offering a reward-based exchange beneficial to both you and your investors. More traditional routes include bank loans or borrowing from family or friends or you might choose to exchange shares in your business with equity or angel investors. Whilst this is likely to attract those who truly believe in the scalability of your company, it is dependent on you potentially surrendering some control over business decisions and directions. 

Business Loans

Borrowing from investors can be a big confidence boost. The fact that others believe in your business model, and you, enough to invest money suggests that they have faith in your success. However, this comes with its own pressures. Some investors may expect a fast return on their investment which means you’ll have to be highly committed to growing your company quickly. Perhaps considering outsourcing, assembling a team and certainly focusing on profit. Whilst this is entirely fair and ethical, such a financial arrangement can deter the course of your business and potentially leave your vision and values behind.

Pixar is a great example of this. The company was founded by creatives intent on steering the future of animation, but they had an investor to consider. His name was Steve Jobs (yes, that one). Although the Pixar studio had some early successes, scooping up awards for their initiative shorts, a few years in they were still losing money. Fortunately for them, Steve Jobs shared their vision. He understood that greatness takes time and that this was a vital learning and shaping time for the company. Consider though, if he hadn’t. Toy Story might never have been made and the studio may not have become the acclaimed creative force it is today, breaking box office records and transforming computer animation. As with any good story, the setup is essential. The experiment paid off because they had an investor who was willing and able to be patient. Who stood back and trusted the vision of the Pixar team. This is a story with a happy ending, but some are not so lucky.

So, when you establish a relationship with an investor it is vital to ensure you set expectations and that they share your ideals. Assess your reasons for wanting to create your business, especially those that go beyond profit. Make sure you are clear on them and that anyone involved in financing your company shares these goals. Most investors providing seed money, and equity investors too, are going to have some say in the way you run things, what the company priorities are and they may even get involved in where you source materials from or where your profits get directed. This can have a real impact on ethical businesses that start off keen to operate in a sustainable way or support causes close to their hearts. It can also stifle creativity. Of course, this is highly dependant on your investor so choose wisely and ensure your contract serves the vision you have for your company.

Having said this, there are some notable positives in having an investor on board. Ones that go beyond their financial input. If you’ve ever watched BBC’s Dragon’s Den then you’ll probably recognise the contacts, experience and knowledge an investor can bring to your business. Especially if you’re a start-up. You may have run businesses before but if you want to launch one with the potential to scale up then the right partners can be a vital component. These benefits are especially relevant to those who have a great idea but lack some knowledge around running a company. 

Bootstrapping

Bootstrapping is a very common way to begin a business. Using your own money to build a company from the ground up is a very worthy dream. It radiates self-belief, fuels determination and breeds authenticity. But it’s tough. I know, I’ve done it with Blue Cactus. Fortunately, the nature of my business means pretty low start-up costs and, as a digital marketing agency, I was able to do most of the work myself so outlay was minimal. Yet that’s not the case for many other business models. Product driven businesses, for example, often need to outsource manufacturing, invest in patents, call in marketing support and pay upfront for materials. This can delay growth, largely because you’ll need to financially support yourself through this. However, when your business does start to make money you get to choose how to reinvest and steer the future of your brand. The bootstrapping approach can be somewhat daunting and lonely at times, which is why many start-ups band together to network, learn from one another and support one another with advice and recommendations. Bootstrapping is arguably the most ethical way to finance a business because it’s you investing in yourself and your vision.

Borrowing

Some of us are fortunate enough to have family or friends with the desire and means to support our dreams. If so, borrowing start-up capital from a close contact may be an option worth considering. However, there are both advantages and disadvantages to this and it’s important to think this throughcarefully.

Often, borrowing from family and friends can mean that interest rates don’t apply and that repayment timescales are more flexible. Your vision will likely be protected as presumably, it’s something they trust and support. Personal relationships though make problems more personal, and so it can up the pressure. You may be subject to feelings of guilt if you’re not able to make repayments as soon as you’d hoped and if their circumstances change your business relationship could be at risk of collapse. The best way to manage this is to adopt the bootstrapping approach and treat their investment as if it were your own savings. This may mean slower growth as you may sometimes be using profits to make repayments as opposed to reinvesting in the business. You should generally be more mindful of how you are spending money and how much focus you place on turning profit in the early stages. Ultimately, the ethical nature of this arrangement is largely dependant on you.

Although accepting investment from friends or family can seem simpler, for the benefit of clarity it is important to draw up a contract. Agree on terms including at what point in the business repayments will be made. Here it is important not only to protect your business but also your personal relationship because the last thing you’ll want when you’re launching a business is any conflict with family members or close friends.

Grants

Grants are the golden ticket! Chiefly because you don’t have to pay them back. They may be offered as part of a government or privately funded scheme and being granted one does suggest there is a need or desire for your business in the marketplace. Or, that you yourself are considered investable. But is there ever any such thing as a free lunch?

Grants are notoriously difficult to get and you’ll have to prove you have not only the need but that your business is deserving. Increasingly, sustainable and ethical businesses are winning grants as they are considered an investment in the future. However, you’ll have to have an airtight business plan and be able to detail how you are going to spend the money and be sure of what the results will be. If you win a grant it is worth remembering also that many others might have applied and so this achievement comes with its own pressure to succeed. Yet, it has to be said that not wasting an opportunity given to you is perhaps the most ethical of motivations.


Bank Loans

One of the most traditional ways of funding a business is to approach the big bad banker. Perhaps though, the image of the mighty bank is a little unfair. After all, a loan from the bank does not give them much, if any, say in the running of your business. You’ll have to convince them you’ll make enough profit to make repayments obviously, but they won’t be peering over your shoulder making suggestions or insisting that you adjust your values to prioritise profit. Although, this also means the arrangement comes without the added bonus of a mentor.

In addition, they’ll be interest to pay on top of paying back the loan and, despite its name, interest actually has very little interest in your ideas or vision. Or, in fact, if you’ll be able to meet their terms and still be able to support yourself. So, although the banks themselves are partially responsible for ensuring you don’t get in over your head, it’s wise to approach with caution yourself and not bite off more than you can chew.