Funding Your Business: Investors
Whether you’re trying to open a new small business or have been a business owner for years, a common factor in success is money. Investors can be a good source of financing for your business.
Regardless of the stage your business is in, an investor can help you with your cash flow. For start-up businesses, an investor can help you operate your business without having to tap into your own personal funds. For mature businesses, outside investment presents the opportunity to grow and expand.
There are two types of investors you can work with to help fund your business: venture capitalists and angel investors. Venture capitalists generally invest in mature businesses. They provide a large investment and expect a high return rate. Angel investors are accredited by the Securities and Exchange Commission (SEC) and invest in businesses that are in their early stages. They also expect a return on their investment, but it’s typically smaller than a venture capitalist.
Despite the benefits of an investor, fewer than 6% of businesses in 2017 used them or another form of financing, according to the U.S. Small Business Administration. Learn more about finding an investor and how you can pitch them to invest in your business.
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Should You Work With an Accredited Investor or Non-Accredited Investor?
In simple terms, an accredited investor means they meet the qualifications set by the SEC. An accredited investor must:
- Earn over $200,000 a year or more than $300,000 combined with a spouse.
- Have a net worth of more than $1 million, excluding the value of their home.
These guidelines aim to prevent everyday people from investing in a company. Because there’s a risk a person can lose their entire investment. Working with an accredited investor means they have financial stability and an understanding of the risks involved with investing in your business. If an accredited investor puts in $50,000 to help your business but they end up losing it, they’ll likely be OK financially. Compared to a non-accredited investor, that $50,000 could represent a large portion, if not all, of their savings.
You’ve got a solid business plan that details how your company will operate, sales strategies and goals. You have information on the small business insurance you bought to detail the steps you’ve taken to protect your company and assets. Now you need to find an investor. You can use the internet or your local community to find investors. Before you start searching, make sure you know whether you want to find an angel investor or venture capitalist.
Angel Investment Network is an online platform that aims to make it easier for entrepreneurs to find investors, and vice-versa. The company has a network of over 211,000 investors and 984,000 entrepreneurs. You can use this website to look for an investor by:
- Creating an account
- Making a pitch for your business
- Connecting with investors you’re matched with
Angel List is another online platform that you can use to find investors. The platform gives startup businesses an opportunity to attract investors. It also helps business owners with recruiting employees and applying for additional funding.
Don’t forget to check professional networking sites, like LinkedIn. This website can help you find investors in your industry and they may even be local to you. If you decide to go this route, make sure you have a complete LinkedIn profile. Any potential investor you connect with on the site will likely check out your profile. If it’s incomplete or comes across as unprofessional, it can hurt your chances to work with an investor. So ensure your profile has a picture, detailed business experience and a thorough description of your company.
You can also look to your local community to find investors. Contact a few business schools at your local colleges. Someone may be able to put you in contact with a potential investor or point you in the right direction. Small business incubators can also be a good resource. Working in an incubator can give you direct access to an investor, who can help you grow your business.
If you run out of ideas, it’s never a bad idea to go to your friends and family. They may know someone who invests in companies or can put you in touch with someone that can help you.
How Much Should You Pay an Investor?
Typically, investors expect a rate of return on their investment. The rate of return varies from business to business. A 2016 study found investors saw an average of 2.5x return on their investment. So for every dollar invested, it resulted in 2.5 dollars returned. The average time from initial investment to completion was 4.5 years.
One way they can see a return on their investment is by taking a stake in ownership of your business. So when you sell the business, they’ll receive a percentage of the sale. If you give an investor equity in your business, you’ll likely have to work with them for business decisions.
Another way you can pay an investor is through royalties. While an investor won’t receive equity in your business, they’ll receive royalty payments. This means for every sale you make, you’ll have to give a portion to the investor. Royalty payments occur for an agreed upon duration of time and can continue up to a specific amount. Think of it similarly to a loan: you receive money from an investor and you have to pay it back with interest through royalties.
Although there’s no clear answer on how much you should pay back an investor, it’s worth it to do your homework. Meet and discuss your business with different investors. You may want to take the first investment offer you get, but there may be a better deal out there. Explore your options.
How Do I Get Investors to Fund My Business?
There’s not a simple answer to get investors to fund your business. Investors hear a lot of pitches. They’ll invest in businesses they think have the best opportunity to grow and make them money. So to break through the noise, you can prepare and make a pitch that give investors confidence in your business.
The last thing you want to do is waste an investor’s time. When you find an investor you want to make a pitch to, make sure you’re thoroughly prepared.
Anticipate questions an investor may ask
Going into a pitch with an idea of what you may be asked can prevent you from being put on your toes and struggling to answer. Investors may ask you about your market, your marketing strategies, sales figures and fund projections. Some examples include:
- What is your marketing strategy?
- What does your growth to date look like?
- Who is on your team?
- Who is your competitor? And how are you different?
- How much cash are you spending each month?
Know what you want to ask investors
If an investor decides to help your business, they’ll be a big part of your business. You’ll want to have a good idea of what they expect out of the investment. Consider these questions:
- How often do you like to meet with the businesses you invest in?
- What other companies have you invested in? How did they do?
- What does your investment portfolio look like?
Know your business
It seems like an obvious statement, but you need to make an efficient pitch that gives investors all of the information they need. Study your business’s finances, know what your cash flow looks like and have a plan to grow in the future.
You’re making a pitch to an investor for an investment. Make them understand how their help can lead to your business growing and succeeding. Describe your strategy and how their investment will be used.
Although less than 6% of small businesses in the U.S. used investors or other funding sources in 2017, they can still be a benefit. Yes, you’ll spend time finding an investor and you may not get an investment offer right away. But being prepared and knowing what you’re looking for and how your business can benefit from an investment can help you land a deal.