Funding is crucial to starting a business and creating a thriving, growing entity. You may have initially self-funded your business with cash, relied on sweat equity, or used credit cards to finance your business. However, you’ll need to consider outside capital at some point if you want to continue growing your operations.
With venture capital, traditional bank loans and online crowdsourcing, today’s entrepreneurs have more funding options than ever. However, choosing the right investor type is critical. Different investors bring unique benefits and assorted types of equity, control and repayment requirements.
We’ll explain how small businesses can find and attract investors, and how to choose the right funding source. Not all capital is created equal; ensure you can live with the investor you choose.
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How to find a business investor
Finding investors is one of the biggest challenges of starting and running a business. Generally, it’s best to start small and move toward more significant funding options later.
Before you seek a business investor, start operations on a small scale. All you need initially is a business concept, a product or service, and a plan. You’ll prove your concept and can adjust your plan to actual market conditions. Prospective investors will want to see a market demand for your offering and proof that you can be profitable before giving you their hard-earned money. Ideally, you should have a track record of at least a year.
Here are five ideas to help you search for a business investor:
- Work with friends and family. Seek funding from friends and family. This can be the best option for getting your business up and running without proving yourself to an outside investor.
- Look for private investors in the community. Often, your community is the best place to seek help in growing your business. Cities and small towns often develop business initiatives because small businesses empower their communities. Additionally, look for local business leaders and investors. Work with any pro-business organizations and seek out significant community influences to network and develop business relationships.
- Work with a local bank for funding. Depending on how quickly you want to scale your operations, you can apply for a business loan from your local bank to build community relations and find funding options.
- Seek out angel investors. If you’ve exhausted the previous funding options, your startup may be ready for angel investors and other private investors in your industry. Research areas where your industry is thriving and contact business leaders and angel investors there.
- Work with venture capitalists. Finding venture capitalists is usually the final stage in a new company’s funding growth, but it isn’t necessary for all businesses. If you run a stable, successful small business, you likely don’t need to apply for funding with a venture capitalist. However, if you have a successful business idea that would benefit from extremely fast scaling and high amounts of capital, working with venture capitalists is a good option.
The primary differences between angel investors and venture capitalists are that angel investors work alone, venture capitalists tend to invest more significant amounts, and angel investors specialize in early-stage businesses.
How to attract an investor
It’s easy to get a general idea of how to find funding, but attracting the right investors and perfecting your business’s sales pitch can be a major challenge.
Before you present your idea to investors, understand that you should view them as business partners. Working with like-minded individuals is best. Investors with a large enough stake in your company will ensure their voice is valued — especially when equity is on the table. Investor partnerships can be advantageous, but they can also be detrimental if forged on the wrong values.
When considering how to attract investors, remember the following best practices.
1. Develop your company mission to attract the right investor.
As part of your business plan and general business growth, you need a company mission statement to build around. Investors want to know your “why” — the reason you think the world needs your product or service. You should be able to communicate what problem your business solves in one or two sentences. You’ll lose investors and customers if your mission and goals are too complicated. You need a clear explanation of your business’s value to be successful.
If you pitch to venture capitalists, include an exit strategy detailing how the investor can pull out its investment plus a profit. This could entail selling the business, taking it public, or receiving a payout at a specific revenue and profit milestone.
2. Flesh out your brand voice to attract investors.
Telling your brand’s story is crucial for finding investors. Investors look for brand value, especially regarding social media and a business’s presence in its local community. If you marry a strong company mission with a distinct, well-developed brand voice, you’re halfway to finding the right investors.
3. Take as many meetings with potential investors as possible.
Finding the right investors means meeting with as many potential investors as possible. Accept any opportunity to talk. Numerous meetings will help you hone your business’s sales pitch, learn how to read potential investors, and decide who would make the best partners.
The process of finding funding is often ridden with rejection and judgment as you try to understand if an investor is offering a good deal. Taking as many meetings as possible will increase your chances of finding funding from the right sources.
4. Don’t get discouraged when seeking investors.
When potential investors decide not to fund your venture, don’t give up. Rejection is part of the process. Do your best to focus on the next opportunity. When things get complicated, fall back on your business’s mission to remind you what you’re trying to accomplish. Remember that if even only one investor agrees to fund your business out of the 50 you meet, that’s still a success.
If you need a fast business loan or less than $50,000 in funding, consider getting an SBA-backed microloan.
6 types of business investors
It’s best to move from small to large funding sources as your business grows. This order, while not set in stone, is a good general focus when considering various types of business investors.
- Friends and family: The first place to look for funding is among friends and family. Especially if you’re a new or emerging business, pitching to your friends and family can be a great way to get your business off the ground.
- Crowdfunding: Like friends and family, crowdsourcing is a good early source of funding. When deciding between business loans and crowdfunding, establish whether there’s a demand for your product or service before posting it on a crowdfunding platform. Crowdfunding, combined with money from family and friends, can help get your product or service started.
- Traditional bank loan: Once your business has some operational history and backing, you can start looking to banks for a traditional loan. Banks require extensive documentation and financial information before issuing loans, so be prepared. If you want to grow a robust local venture, choosing the best business loans can be an excellent way to go from a fledgling operation to a bonafide company.
- Angel investors: Contacting angel investors is a good early funding step that can grow your business from a small operation to a larger company. Look locally first, then move outward until you find private angel investors.
- Venture capitalists: Once you have some serious backing, pitching to venture capitalists can be a great way to acquire large amounts of money to scale your business. Pitching to angel investors can be good practice for pitching to venture capitalist firms later.
- Accelerators: Accelerators are a great way to achieve profitable growth. Some provide funding options, but most connect you with seasoned startup veterans who can give you advice on finding funding, developing your products and building your organization. Accelerators aren’t typically a primary funding source, but knowing how they can benefit your startup is essential.
If you’d like to pursue bank loans to fund your business, check out our reviews of the best business loans and financing options. We break down borrowing costs, loan terms, collateral requirements and more.
Benefits of business investors
The biggest benefit of finding business investors may be obvious: They give you money to run your company. Businesses need capital to grow, and working with investors means you don’t have to grow the old-fashioned way — slowly, brick by brick. Instead, you get a cash injection, and your business can expand rapidly.
However, finding funding isn’t as simple as convincing investors to give you large sums of cash. Seeking investment means trading something for access to funding.
- You may have to give up equity. With venture capitalists and certain angel investors, you will give up equity in your company in exchange for funding — which may mean investors have decision-making power on significant company issues.
- You may pay for the money you receive. With banks, you’re borrowing money, so you’re paying a premium, or interest rate, on the amount of money the bank lends you. This also has strings attached, as many banks want to know how you plan to use your loan before they issue it. With online crowdfunding platforms, you may be trading inside access or even equity for funding.
Working with investors is an excellent way to take your business to the next level, but it’s a trade-off no matter who provides the money. Weigh your options and consider what you have to give up to get the funding you need. This doesn’t have to be a cutthroat approach; it’s a crucial distinction to help you approach funding with a successful mindset.
Matt D’Angelo contributed to this article.