A Guide to Small Business Investors
Investors have an interesting role when it comes to helping grow a business. While they can be a necessary component for growth, they can also make or break the success of a startup. That’s why it is so important for entrepreneurs to do their research before choosing or even pitching to potential investors, as there are different types out there, each with specific goals and agendas. Investors can be involved in practically any stage of a startup.
Here are some of the most common investor types and some best practices for soliciting them for funds.
Banks
A bank is probably the most obvious source for a loan or investment. However, banks typically require anyone seeking a loan to provide collateral upfront or proof of a consistent stream of revenue before their application can be approved. But many entrepreneurs spend their life savings on their product and even quit their jobs to focus solely on it, so they may not have the cash reserves that a bank requires. That’s why it’s typical for more established entrepreneurs to use banks for loans. For example, a clothing company that initially specialized in restaurant industry uniforms might already have a loyal following and decide to expand to uniforms for other industries. A bank would be a good choice to secure that funding.
Peer-to-Peer Lenders
Certain groups and individuals want to fund the projects of small business owners, but don’t want to take the time to seek them out. As such, they join peer-to-peer lending groups that allow them to search through applications to determine which ones are worth their time and money. To be seen by these lenders, entrepreneurs need to apply with peer-to-peer lending companies, wait for approval, and then sit tight for an offer. The entrepreneur has little control in how quickly this process happens.
Venture Capitalists
Venture capitalists have a goal of providing their investors with a high return rate. Therefore, they only invest in startups that have the potential to earn them lots of money. That’s not to say the investment isn’t risky, though. Some of the most profitable startups were once risky to invest in. Maybe you own a niche company that specializes in custom outdoor business clothing for stadium workers in the wintertime. One investor may see that as risky because winter weather isn’t an issue in warmer climates, while another investor might see your opportunity as a way to dominate that niche market. Nonetheless, you need to show a significant amount of profit before even considering approaching a venture capitalist for funding.
Angel Investors
If you don’t have enough revenue growth to consider asking a venture capitalist to invest in your startup but are past the early stages of funding, an angel investor might be your solution. Angel investors have an earned income of more than $200,000 or a net worth of more than $1 million. If you seek funding from them, they may want a share in your business.
Best Practices for Soliciting Funds From These Investors
- The choice of an investor involves more than just trying to get money. You also have to be committed to spending some time doing research in advance. Look into their past partnerships and investments. Consider the services they provide. Look into what expectations they may have of you as well. They may want to be highly involved in your day-to-day operations, or they may not have any interest in them at all.
- It may also help if you reach out to some references who can recommend you and vouch for your character. Put yourself in the shoes of the investor, and imagine how difficult it would be for you to hand over a large sum of money to anyone. You’d likely appreciate someone telling you, “I’ve worked with this person, and this person is highly reliable and motivated.” Show that you’re not a risky investment by reaching out to your professional connections for recommendations. What do you have to lose? If you’ve already made a name for yourself, you may not even have to ask around. This is a good practice before you even need to seek out funding from an investor. Attending networking events and handing out promotional products should be a regular practice for startups anyway.
- After you get the attention of a potential investor, work on perfecting your pitch. Focus on the facts and anything that will show them that you’re worth the financial. Be confident in how you speak, and present yourself in a way that makes the decision to work with you a no-brainer. Investors need to see that your product or service solves a problem, and they need to see that you have a plan that will show them a return on their investment.