Funding Your Business: Find an Investor

You might be considering of opening a new small business or have been running a business for years, and you probably know that money plays an important part in success of a business. Money makes start-up environment go round. Attracting investors can be beneficial source of financing for your business. Though investors are a great source of funding your small business, many business owners feel that it might get difficult to maintain control over the future direction of your business.

 

Investors acquire ownership equity, meaning that they are eligible for a percentage of all future earnings. And in some cases, this could be quite a substantial amount of money if the business continues to grow.

Here is our small guide to funding options to help you get your small business off the ground.

 

Types of Funding

Venture capital is one of the most popular forms of start-up funding. The pool of investors such as well-off individuals, giant super funds and pension funds, investment banks and other groups invest in venture funds, which are managed by investors, who invest in startups on their behalf, taking ownership stakes in the small businesses they invest in, while offering expertise to help the business grow.

VC funds typically invest in start-ups deemed to have high growth potential, or which have demonstrated high growth (in terms of number of employees, annual revenue, scale of operations, etc). Moreover, many VC firms also have their own specialist areas, and are interested in founders with whom they can have a good working relationship with, and businesses they can add value to. Usually, VCs require an in-depth and airtight business plan, but they can also give you larger amounts of money.

An angel investor (a private investor, seed investor or angel funder) is a high-net-worth individual who provides financial backing typically in exchange for ownership equity in the company, and often is found among an entrepreneur’s family and friends. There could be different payment schemes, ranging from a one-time investment to assist business at the start, or provide ongoing installments to support and carry the company through its difficult early stage. Often, they will be keen to contribute to the startup’s success with skills, knowledge and contacts.

Debt funding represents a cash injection provided by an external lender such as a bank, building society or credit union, and without having to give up any equity in your business. Instead, the funding has to be repaid over a set period. The financial institutions offer a range of finance products – both short and long-term. These include: business loans, lines of credit, overdraft services, invoice financing, equipment leases and asset financing.

Crowdfunding occurs when businesses, or individuals fund a project or venture with small donations as little as $10 from many people. By receiving the necessary injection to cash flow, these ventures can get off the ground or launch new projects. Most of these campaigns happen via internet platforms, have set timeframes for when money can be raised and disclose specific monetary goals.  It is important to read the fine print of different equity crowdfunding platforms before choosing one to use as some might charge payment-processing fees or require businesses to raise their full financial goal to keep any of the money raised.

 

Pros of using an investor to fund your business:

  1. Access to capital – ‘it takes money to make money’ – will allow you to grow and build your business and increase your revenue.
  2. You create potential for true partners with industry experience and connections
  3. Private investors understand and accept the risk that if your business plan fails, they can lose their money. If their investment goes south, you’re not responsible for repayment.

 

Cons of using an investor to fund your business:

  1. Investors dilute your share of earnings – giving up some control and the right to some portion of your future earnings
  2. Early stage equity could be much more valuable later as the business grows (and you may wish you still had full ownership)
  3. In exchange for taking on additional risk, investors generally have higher performance requirements that can create a lot of pressure, especially if your business is not meeting them.

 

What Do Investors Look For?

Investors look at a lot of things, when deciding whether to put their money, or their company’s money, into another business. This includes an examination of a company’s:

Investors will also want to know how they can get their money out of the business, when the time comes.

 

Finding investors

To find investors, you can use the internet or your local community. It might be beneficial to contact a few business schools at your local universities with a strong business or entrepreneurial program and ask if someone may be able to put you in contact with a potential investor or point you in the direction resources.

Online resources provide an extensive list of opportunities to find investors. Platforms such as AngelList, Microventures, LinkedIn, and even Quora can be effective sources to find angel investors. Be aware that with online resources, it is important to establish some sort of credibility. The easiest way is by looking specifically for investors in your own market.

Small business incubators can also be a good resource. Join regional tech and startup groups on Facebook and LinkedIn, attend events, help out with an organising committee, and meet as many people as you can.

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