How to Find an Investor for Your Business
How to Find an Investor for Your Business
One of the questions I am asked most often is "How do I find an investor for my business?" However, having an investor can make life easier or a hell lot harder for an entrepreneur. That’s the reason why entrepreneurs need to consider a few factors before choosing investors for their businesses. Remember, anybody can invest money, but only a few can give sound advice on running a business. As an entrepreneur, you need someone who will understand your goals and can be helpful to you in both ways. Finding an investor is a matter that you should take very seriously, so do not jump at the first person willing to give you money.
Choosing an Investor for Your Company
As an entrepreneur, your first job after proving your concept is to find an investor. It is important to find someone on whom you can pin your trust and who will not abandon you if your business goes through tough times. You must also seek an investor who’ll be adept in solving your current business problems. As GroupMe co-founder Steve Martocci notes, “you need different types of investors for the various stages of your company’s life cycle.” Therefore, it is important to understand where your business is now, where it is going, and who can best get you there. The investor must also have sound knowledge about the market you’re involved in and be able to give you sound advice and instructions. Also, select investors from diverse industries with diverse skill to find and solve problems you may not expect. Finally, it is critical that the investor is aligned with your interests instead of having ulterior motives.
Why Do You Need An Investor?
You can start your business without an investor, this is called bootstrapping. However, there will come a day when you need to expand your business operations or take on some risk. Lack of capital is one of the most common reason businesses fail. The truth is that you need a large amount of money to grow your business successfully. Bootstrapping won't cut it. The expenses only multiply when you have a large infrastructure and staff; you have to have a huge operation to benefit from economies of scale. Because of this, you need adequate capital from an investor to successfully run your business. The investor can also give you sound advice on financial matters. Whether you’re launching a new product or upgrading capital on equipment to lower production costs, investor resources can be immensely helpful.
Types of Business Investors
Business investors can be broadly classified into:
- Personal Investors: Family members, acquaintances and friends who have the means are can considered as investors. Often jokingly called "FF&F in the industry (Friends, Family, and Fools), these are the most common investors in start-ups and should be the first place you look. However, do not trick yourself into thinking that they are in this out of the goodness of their heart, even family wants an ROI. Before committing to this type of investing, the financing contract must be thorough and should outline the size the investment, the ownership arrangements, the rate of return, future capital calls, etc.
- Angel Investors: Investors with considerable financial resources who invest in start-up businesses are called angel investors. Basically, an angel investor is a wealthy person that often invests in businesses that have a hard time in attracting other investors. An angel investor may sometimes demand only a percentage of return on his investment or he may also ask for partial ownership in the firm and get involved in management decisions. Angel investor deals range from hundreds to even a few million dollars. However, because of the low rates of return on this type of investing, angels are very picky.
- Venture Capitalists: Venture capital firms are funding organizations that invest in companies that are still in the early phases but have have a history of returns. Venture capitalists are only involved in big deals and rarely show any interest in start-up ventures. Venture capitalists demand partial ownership in the business and demand a say in management decisions.
- Investment Banker: A person who works in a financial institution that is primarily involved in raising capital for government, companies and other entities is called an investment banker. Investment bankers have access to a larger pool of funding, but they only are interested in businesses with a solid history of steady returns. Investment bankers can also provide financial advice to their clients on topics such as acquisition and mergers.
- Public Offering: Selling an interest in your company on an open exchange is a public offering. "Going public" is often the dream of many young entrepreneurs. A public offering can quickly fill a company's coffers with cash, but it increases the complexity of managing strategic decisions. Additionally, a public offering is heavily regulated by the Securities and Exchange Commission (SEC), so this type of funding should only be sought by companies that can afford the exorbitant legal fees necessary to maintain compliance.
- Peer-To-Peer lending: A popular and trendy form of lending made popular by Kickstarter, this kind of lending is arranged through websites that bring small business owners and investors together. The lender is a private person and cannot receive an interest in the company by law. The owner and the lender negotiate on the interest rate or some other return and the lender provides the funds. While popular, this form of financing is still in its infancy and is subject to tremendous regulation, so proceed with caution.
Non-financial Benefits of Starting a Business with an Investor
Money is the most important factor in starting and running a business. However, apart from providing the funding, investors can bring in non-financial benefits to your company. An investor can give you professional advice and contacts, which are added investments to help you grow your business. The investor would motivate you at every step and offer you strong moral support when you struggle to launch your business. A company that can attract investors can actually trade on that goodwill. Your business partners and customers would always feel secure about doing business with you when they know you have an investor to support you. In the current economic scenario, having a good investor can actually turn the tables in your favor.
Finding an investor for your business is not as simple as it often seems. It requires identifying your business's character and which type of investor might be the best fit. It is also important to weigh the other assets and skills that an investor can offer as well as money. When trying to find an investor for your business, you should consider an investor as a partner, and not just a banker.
If you need help finding or selecting an investor for your business, give us a call at 205-545-7278 or complete the contact form to the left.