Which business funding option is the right fit?
How to Find an Investor for Your Small Business
Whether you’re in the very beginnings of your launch phase, or you’re an established small business that needs a little push to get to the next stage of growth, finding a trustworthy investor can be key to realizing your goals. There’s so much conflicting information out there, however. What type of funding is best? How can you find investors? What’s the best way to reach out?
Before you jump in blindly, get to know the various types of investors. You may not have considered some of them. Others are a better fit for the amount of money you need – and how you plan on spending it. From friends to angel investors, we’ve got the rundown on the most sought-after business financing options for today’s entrepreneur.
1. Look for Angel Investors
Have you thought about the term “angel investor?” The name says a lot. These investors will put a good chunk of cash into your company, but unlike venture capitalists, won’t usually ask for a significant seat at the decision-making table. Partnering with one or two angels before opening your company to a full round of seed funding (such as a series A), can help create deep partnerships with those early supporters of your businesses. You can do a lot with the money, but don’t have to spread yourself thin by pleasing more than one or two new investors at a time.
So, where can you find people with a passion for investing? There are networks of them, usually location-based that you can join. (Examples include AngelListand the Angel Investment Network.) They might be part of a funding program from an investment firm or group. You won’t be able to see who the members are, as these pre-screen investors value their privacy.
If you play your cards right, however, and come armed with a solid business and marketing plan for how you’ll use the money, your application might make it through to dozens of qualified and interested members just ready to take on their next project. While you can still go in search of individual angel investors, this membership model is more effective, and can even give you the leverage to choose the partnerships that work best for you.
2. But Start with Friends and Family
Even when making that list of angel investors, you shouldn’t overlook this category of investment opportunities. It can take time to form strategic partnerships with new investors. In the meantime, your close relationships can be a trusted source of funding, provided you handle the partnership professionally. Currently, borrowing from family and friends accounts is a respected way to bootstrap – or, self-fund your business. To make it work, however, you’ll need to follow some guidelines.
In addition to laying everything out clearly in a well-written and legally-binding contract, you’ll want to set clear verbal expectations on the role your investors will play in the business. If you just want the cash – and not your Aunt Jenny’s advice on how to decorate your corner office – say so. Don’t assume anything when working with loved ones. Clear boundaries and regular communication are the only ways these arrangements work well for all parties.
3. Reconsider Venture Capital
If you’re reading any of the entrepreneur publications out there, you probably hear about venture capital and the rise of VC firms. This method of funding, while substantial, isn’t realistic for most startup businesses. In fact, less than 0.5% of new businesses get venture funding through venture capital firms. It is only designed for high growth businesses – usually a tech startup.
Unless you have an idea for the next Facebook or a patent on something that will transform a high-worth medical procedure, your time is better spent pursuing other avenues.
If you do have what it takes to secure this funding, however, understand how it differs. This funding assumes a longer investment with significant control given to the investor. Most venture capitalists will insist on not only equity in the value of the company, but a seat on the board of directors and other decision-making roles that will come into play in the daily operations of your company. Entrepreneurs shouldn’t take it on if you can’t part with some of the value of your company and its control. Professional investors will want their say in how things work.
4. But Consider Equity Crowdfunding
A suitable alternative to the venture capital path for startups is equity crowdfunding. This investment opportunity works much like other crowdfunding campaigns you’ve seen for everything from comic book artists to the next big thing in beer coolers. The difference, however, is that you aren’t giving away trinkets, early access to products, or shout-outs. On these crowdfunding sites, you’re giving up equity.
These campaigns are run on equity crowdfunding platforms. Many have cropped up since the passing of the JOBS Act, which has made it easier for this type of startup funding to take place. Like any other crowdfunding platform campaign, you’ll need your marketing plan and slick assets to sell your potential investors on why they should pick you – instead of the thousands of other businesses clamoring for funding.
You’ll also need to be prepared to part with some of your autonomy as a business owner. Decide in advance how much of your equity you can part with, and how that will affect bringing on future investors into the company.
5. Make Sure You Comply with the Law
It’s important to keep investment opportunities legal. Know the basics about what the SEC requires, including how accredited investors compare to non-accredited investors. Currently, only accredited investors can invest in certain offerings, as they have met the requirements to show that they can sustain losses that may come from risky investments.
They meet the threshold of having earned income of $200,000 in each of the previous two years and a high net-worth of $1 or more. In order to stay within the law, you’ll need a process to ensure that you’re dealing with those who are legally allowed to make investments in your company. Entrepreneurs should consult an attorney if you’re unsure if someone is qualified for investing.
6. Familiarize yourself with Debt vs. Equity Financing
There’s a significant difference between debt vs. equity financing. With debt financing, such as a loan, the money is expected to be paid back, and the lender makes their profit from interest charged on the loan amount over time. With equity financing, however, the money isn’t usually paid back. The value received to the funder comes through owning a portion of the company. When the company grows as a result of their investments, their value in the company grows, too.
The pros of equity financing are that the investor has a significant interest in seeing you do well with your idea. In addition to giving you money, they can advise and counsel the founders, give you access to their talent network, or help you with marketing and promotion. The downside is that they would own part of your company. If, at any time, you didn’t like working with them, it’s difficult to unentangle.
The pros of debt financing are that you are free of the relationship once that last loan payment is paid off. While you’re making payments, there’s little the lender can tell you to do with regard to your business. The downside to debt is that, if you fail to make your payments on time, you could lose your business or significant assets. You are also only getting cash. There’s no additional advice that most banks give. The exception is some of the SBA loan programs, which can provide technical support or mentoring as part of the loan program.
Frequently Asked Questions
Here are some additional questions commonly asked by entrepreneurs regarding investments for startups and small businesses.
What is a fair percentage for an investor?
There’s no set number for a percentage of equity given by the founders, and what make seem “fair” to one company may not be for another. The average ranges from 20 – 58%, or more! It really depends on how your company is valued at the time and the amount given to you by the investor. It’s also important to know if they are asking for a percentage as equity in your company or a percentage return on their investment. There’s a big difference here.
Where can I find angel investors?
Angel investor networks, such as AngelList, are popular options. Your best bet is to network with other companies in your industry to see what resources have worked for them. Networks will come and go, so staying on top of what’s new can prove very helpful.
How do you attract investors?
Founders with a path for success can create attention for their business in a number of ways, including networking with proven startup investors, asking for advice, partnering up with a well-known co-founder, and promoting your early success to the right crowds – including on social media. Consistent performance matters. Whatever you do, appear to be the best of the opportunities that the right investor would be wise to take on.
What are other ways to find investors?
If you’re still not sure how to find an investor, don’t rule out these options. Business capital brokers are a good option. You can also learn a lot about interested private investors through networking with accountants, business groups, real estate investors, and investment advisors. They often hear about people looking for an opportunity. Finally, don’t discount what you can learn by attending real estate investing clubs. These are often gold mines for information. You can also get a foot in the door through one of several well-known startup incubators.