One of the most important aspects of running your business is finding funding. Between venture capital, traditional bank loans and online crowdsourcing, there are now more funding options than ever before, but it’s critical to choose the right type of investor.
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Benefits of business investors
The biggest benefit of finding a business investor may be obvious: They give you money to run your business.
Businesses need capital to grow, and working with business investors means you don’t have to grow the old-fashioned way – by building your business slowly, brick by brick. Instead, you get a cash injection and your business can expand rapidly.
This is most notable with some Silicon Valley startups. Many prominent technology companies needed massive amounts of cash quickly in order to scale their offerings and meet immediate demand.
However, finding funding isn’t as simple as convincing investors to give you large amounts of cash. Seeking investment means trading something for the access to funding. With venture capitalists and certain angel investors, that can mean equity in your company, which in some cases could mean that they have decision-making power on major company issues. 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. [Read related article: Private Equity vs. Venture Capital: What’s the Difference?]
Working with investors is a great way to take your business to the next level, but it’s a trade-off no matter who provides the money. When seeking funding, you need to 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 more of an important distinction to understand in order to approach the funding with a successful mindset.
How to find a business investor
Finding investors can be one of the biggest challenges of starting or running a business. In general, it’s best to start small and move toward bigger options later – in terms of whom you seek fund from as well as where you look for funding.
As a small business or startup, look to your local community first. Cities and small towns are constantly developing business initiatives to get businesses to grow locally. If your nearest city doesn’t support the industry you’re moving into, spread your search a little at a time until you find one that does. Depending on your business type, you may have to go to where the money is.
Once you have a business concept, a product or service, and a plan, you’re ready to start looking for funding. Here are five ideas to help you search for a business investor:
- Work with friends and family. Start by trying to find funding from your friends and family. This can be the best option for you to get your business up and running without proving yourself to an outside investor.
- Look for private investors in the community. Oftentimes, the best place to look for help growing your business is your own community. Look for local business leaders and investors. Work with any pro-business organizations, and network and develop business relationships with the major influencers in your community.
- Work with a local bank. Depending on how quickly you want to scale your operations, applying for a loan with your local bank can be a great way to build community relations and find good funding options.
- Seek out angel investors. If you’ve exhausted the previous options for finding funding, look outside your community for angel investors and other private investors in your industry. Find areas around the country where your industry is thriving, and contact business leaders in those areas.
- Work with venture capitalists. This is usually the final stage in a new company’s funding growth, but it isn’t a necessity for all companies. If you run a stable, successful small business in your community, 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, then working with venture capitalists is a good option to pursue.
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.
- Friends and family: The first place to look for funding is with your 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: Much like friends and family, crowdsourcing is a good early funding source. It’s important to establish whether there is a demand for your product or service before posting it on a crowdfunding platform. Funding from these platforms, combined with money from family and friends, can be a great way to get your product or service started. [Read related article: Equity Crowdfunding: A Primer]
- Traditional bank loan: Once your business is established, with some operational history and backing, you can start looking to banks for a traditional loan. Banks require extensive documentation and financial information before they issue loans, so have all that at the ready. If you’re looking to grow a strong, local business, bank loans can be a great way to take your business from a fledgling operation to a full-fledged company.
- Angel investors: Much like seeking bank loans, contacting angel investors is a good early funding step that can take your business from a small operation to a larger company. Look locally to begin, 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 when it comes time to pitch to venture capitalist firms.
- Accelerators: Accelerators are a great way to grow your startup. 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 main source of funding, but it’s important to be aware of how they can benefit your startup.
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 extremely difficult.
Before diving in, understand that any investor you work with should be viewed not just as a funder but as a business partner, so it’s best to work with like-minded individuals. Especially when equity is on the table, investors with a large enough stake in your company will make sure their voice is valued. These kinds of partnerships can be advantageous, but also very detrimental if they’re forged on the wrong values. When thinking about how to attract investors, keep these main steps in mind.
1. Develop your company mission.
As part of your business plan and general business growth, you need a company mission 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. If your mission and goals are too complicated, you’ll lose investors and customers alike. You need a simple and clear explanation of your business’s value to be successful.
2. Flesh out your brand voice.
One of your most important tasks as a small business owner is building your brand and company voice, which is the most outward-facing aspect of your business. Investors look for brand value, especially when it comes to social media and presence in your local community. By marrying 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. This will not only help you hone your business’s sales pitch, but also to read potential investors and decide who would make the best partners. Finding funding is often a process ridden with rejection and judgment. By taking as many meetings as possible, you’ll increase your chances of finding funding.
4. Keep at it.
Don’t get discouraged when potential investors decide not to fund your venture. It’s part of the process. Do your best to focus on the next opportunity. When things get difficult, 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 50 you meet, that’s still success.