When you’ve mapped out the coming months for your business and expect to need a good amount of capital to grow, you may need to find outside funds. If you have a wealthy family member who believes in your venture, you’re in a good position. Otherwise, you can seek funds in the form of debt or equity financing.
Debt financing is when you take on someone else’s money in exchange for interest paid throughout the duration of the loan. Equity financing is when you take on someone else’s money in exchange for some ownership of your company.
Two popular forms of equity financing are VCs, or venture capitalists, and angel investors. If you’re thinking “I’ve heard of those and want in,” ask yourself these questions first:
- Are you ready to share control of your company? VC firms and angel investors can provide capital, guidance, and a big network of important people, but you may have to give up partial control of your company.
- Is your company the type of business that equity financing would work well for? VCs and angel investors are looking for generous returns on their investment in a short amount of time. If you’re a slow growth company or aren’t focused on how you will scale, this is not the way to go. Venture capital funding in particular is best for companies who already have proof of concept and a management team with a proven track record.
- What stage or development is your business in? If you answered “yes” to the previous two questions, ask yourself this. A startup that’s just getting off the ground or trying to get from business plan to proof-of-concept, will want to focus on angel investors. Many angel investors will even want to see that you’re selling already. Venture capitalists will almost always want to see that you’ve proven that your product or service is something people want.
- Do you have your documents in order? If you’re a brand new company, you’ll need a sound business plan and financial forecast that’s based on industry averages or larger companies related to your business. If you’re already in business you’ll need additional documents like your financial statements from your previous months/years in business.
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Angel investors can simply be a source of funds, or they can be a source of funds, advice and expertise. Both types can be found both online or offline.
Offline investors would likely be wealthy individuals in your area or that you are somehow connected with. Ask your friends or other business owners if they know of any angels that work with businesses like yours. Angels will do their research on your business, so you’ll need to research them as well — if you’re a medical device company, don’t target angel investors that are exclusively interested in retail.
Online investment platforms are another option for finding angel investors. Sites like OneVest, FundersClub, and Seedrs connect investors to small businesses. This is a good option if your business is ripe for investment but you don’t have the personal network to make it happen. These sites and the investors that use them are generally looking for early-stage companies with experienced leadership teams that have already demonstrated traction.
Venture capital firms demand even more than angel investors in terms of the financial projections of your business (think 10X on their investment in five years). Here are a couple tips for finding VCs:
- Research firms that fit with your type of business and stage of development. Are there VC firms in your local area that fit the bill? Those should probably be at the top of your target list.
- Go through your address book and find out how you’re connected to people at the firm. This is one of the most preventative steps for business owners seeking venture capital funds. You’ll need to get an introduction to a representative of a VC fund, whether it’s an associate, partner, etc. Cold calling a partner at a VC firm is usually fruitless—they want a recommendation from a trusted source.
- Once you’ve narrowed down the pool, make sure the firms you’re considering have a solid reputation. Check out sites like The Funded to see what folks who have previously pitched or worked with the firms have thought of their experience.
- Once you have an idea of how you’re going to get an intro and to which VC firms but before you reach out, craft an executive summary that will be sure to grab an investors attention. Have an elevator pitch for you business that you can bounce off your contact giving the intro. If they’re doing the intro via email, make your response personal — don’t send the same email to every potential investor.
Alternatives to Outside Investment
If you’ve arrived down here and are thinking that an outside investor isn’t the perfect fit, here are a couple other options you can consider.
- Friends and family. Here’s where you reach out to your rich, saavy, aunt to pitch her your business idea. Be careful with this method—if your business goes under, you don’t want your relatives coming after you for their money. Decide ahead of time whether you want to take on their money as a loan with interest or offer them part ownership in your company, and start the conversation with an idea of what the terms of your agreement with them will be.
- Source capital from your community. If you’re offering a product that your community can get behind, consider pre-selling it on a crowdfunding site. Crowdfunding sites like Kickstarter and Indiegogo allow you to showcase your product to a national or international community. Community sourced capital is another option for local businesses. Via these sites you offer rewards — a first pick at the supply of your product, a T-shirt with your company’s name on it, or even a thank you card — to those willing to put in some cash.
- Debt financing. Business loans and lines of credit are hard to get if you’re a brand new company. But if you have excellent credit and a good relationship with your bank, you may be able to use business credit cards or personal financing sources (personal loans, credit cards, or lines of credit) to get your business off the ground. (Sign up for a free Nav account to see where your credit stands.)
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