How to find investors
Instead of going into debt, you could sell a part of your business to raise cash. This is called equity financing. Let’s look at the types of investors, what they want from your business, and where to find them.
Types of investors
Equity financing has become more popular in recent times, due largely to the growth in tech industries. Banks were less willing to take a risk on these types of startups but private equity investors could see the potential, put their money in, and were richly rewarded. It gave rise to a bigger investment community.
The easing of investment restrictions has opened up opportunities for ordinary people to invest in a business.
The main sources of equity financing are:
Angel investors are wealthy individuals who invest their own money in exchange for a share of the business. They generally want to be involved in business decisions and may want to cash out after a few years. It will help if you can present a profitable exit strategy for them. An angel investor might be someone who wants to invest in your industry, or your community.
Equity crowdfunding allows you to raise funds from the public in exchange for unlisted shares (equity) in the business. This is generally for consumer products or services (not B2B) and you’ll do better if there’s a wow factor to what your business is planning to do.
Professional investment companies that invest their clients’ money in exchange for a substantial share of the business. VCs prefer to invest in companies that they expect to deliver massive and preferably fast growth.
Those loved ones who support your dreams with their own money. Many budding business owners turn here as a first option. And some do it as a last resort.
Incubators and accelerators exist to build and boost small businesses. Some will focus on a specific industry, such as tech. Accelerators are more likely than incubators to have seed money to invest as they’re focused on scaling a business they see has potential, rather than innovation.
Are you ready for equity financing?
Equity financing isn’t an option for every type of business. It’s not suitable for sole traders. If you want to sell shares, you’ll need to be a company (although you can sell an interest in a partnership). So you need to have the right business structure before you head down this route.
How big is the pie?
Having a lot of shareholders might put off larger investors in the future. So consider carefully how many investors you want to take on board. Think about how you want to structure any deal alongside the debt funding you already have or might take on in future.
Know your worth
Know the value of your business – get a professional business valuation done. Then you know what you’re swapping or selling in exchange for funding.
Before you commit to seeking funding this way, talk to a lawyer and accountant about the legal and financial implications of equity financing. Research and understand any current and upcoming regulations and laws you’ll need to comply with.
Where to find equity financing
Your first step to finding equity funding is to check what types are legal in your market. For instance, equity crowdfunding platforms aren’t permitted in all countries. In the US, UK, Australia and New Zealand equity crowdfunding is allowed.
Central and local government websites should have information about registered venture capital and crowdfunding platforms and any regulation requirements.
Other places to check are:
Business incubators and accelerators
They may have seed money (to help to start a business) to invest and they have access to angel investors.
Small business and industry associations
They may have information about equity funders their members have had success with.
Your accountant or bookkeeper
They may have other clients who’ve been successful getting equity funding. Or they may have clients looking to be angel investors.
They might be able to put you in touch with equity funders or venture capital firms.
- Friends and family
They may be more patient about getting a return and not want to exit the business as quickly. Or they may know other people wanting to invest.
What makes a good investor for your business?
If there’s ever a time to look a gift horse in the mouth, it’s when you’re considering investors for your business.
While it can be tempting to shout an emphatic “yes, please!” at someone offering you money, stop yourself. Not all investors are created equal. Before you get yourself saddled with someone incompatible here are some qualities to look for. Ideally, they’ll be:
local – so you have access to them, and they don’t forget about you
in your industry – so you can draw on their experience, enthusiasm and contacts
connected – so they can introduce you to the right people
committed – so they’re with you for the long haul
The right investor can offer more than just their cash. They can share their experience and connect you with the right people to help your business grow. For example, they might introduce you to new customers, great suppliers, lawyers, accountants, bankers, other investors, business advisors, or contacts in the media.
What does an investor want to know about your business?
Investors want to know you’ll make money for them. They’re not out to steal your ideas. That said, make sure you file any necessary patents, trademarks and copyright paperwork before you start working with them, just to be sure.
It helps to understand what makes an investor tick. When you know what they want from you, you can present a far more compelling pitch. They want:
They’re taking a bigger risk than a bank and so they expect fatter rewards. They want to back businesses that they think could explode.
Involvement in the business
Most want to protect their investment by personally helping the business grow. They’ll need assurance that you’ll listen to and act on their advice.
Dividends or climbing share value
They’re investing to get a return. That can come as a dividend (profits shared among shareholders) or as an increase in the value of the business (so they could potentially sell their shares). You need to show them you’ll be able to deliver one of those things. And be aware that to help them eventually cash in their shareholding, you may also need to sell yours!
If you’re not prepared to put any of your money into the business, why would they be attracted to invest? You’ll need to put up a good portion of the funds.
- Your exit plan
Let them know if you want to build the business quickly and flip it. Or if you’re in for the long haul. There’s nothing wrong with either strategy. But your investors will want to know your intentions.
How can you impress potential investors?
Show you want to make money with them and for them – not just take it from them.
What’s your plan?
Show them a solid business plan and demonstrate sound financial thinking. They want to see that you can grow fast, and have a plan for delivering good returns and increasing the value of the company.
What’s their plan?
Talk about their plans too. Where do they see the business going and how involved do they want to be?
Take the time to prepare the necessary documents and complete everything they require. Send them your prepared documents ahead of meetings so they have time to review them.
Check how you look online
If your company has an online presence, be aware potential investors may look you up to find out more. Is there anything you wouldn’t want them to see? Can your social media work in your favour and show the potential for growth through your fans and customers?
Being competent with your pitch is a good sign that you’ll be competent running a business. Check out our chapter on building a funding pitch.
Are you looking for an angel?
Relatively few businesses can attract investment through VCs, crowdfunding, or accelerators. If you can’t either, then you probably need an angel. Our next chapter looks at them in more detail.