When starting a business, next to having a good business idea, one of the most important things you'll need to do is find business investors. This process can be daunting, but it's important to remember that there are plenty of investors out there who are looking for new businesses to invest in. In this article, we will discuss some tips on how to find the right investors for your startup and make the process as smooth as possible.
Before you start to look for potential investors, make a list of those who you think would be a good match. If you have no idea even where to start with this, do some quick research, search for similar companies and see who has invested in them, check investors in the sector you operate in, and ask any other founders you may know about investors. Then, go to their websites and social media profiles to learn more about them.
When it comes to finding out more about an investor’s investment philosophy and current portfolio, it shouldn’t be too difficult. Your networking skills will shine if you are good at obtaining such information through third-party channels. It is important to check the company’s reputation and their preferred stage of development for portfolio companies.
Types of different funding options
Before we dive deep into how to find the right investors, let's take a step back and discuss different types of funding that are available. This will help you to better understand when and how to use each type of funding.
Bootstrapping
The first, and most common, type of startup funding is using your own personal savings (Bootstrapping). This is often the best option for those who have a steady income and are confident in their ability to generate revenue quickly. The main advantage of using your own capital is that you retain full ownership and control over your company. Additionally, there is no need to give up equity or pay interest on loans. However, the downside is that you are putting your personal finances at risk if the business fails.
Friends & Family
As a small business owner, friends and family are usually the first people you turn to when you need money. This can be handled in two ways, either as an equity investment, similar to angel investors, which we explain later below, or as a personal loan. The terms of the loan will vary in each case.
Small Business Loans
Another common type of startup funding is small business loans. A Traditional business loan is typically issued by banks or other financial institutions and can be used for a variety of purposes, including start-up costs, equipment, inventory, and working capital. Small business loans usually have fixed interest rates and repayment terms, and they can be either secured or unsecured.
One of the main advantages of small business bank loans is that you will not have to give up any equity in your company. However, the downside is that you will be responsible for repaying the traditional bank loans regardless of whether or not your business is successful. It is also worth mentioning that banks are usually unwilling to finance ventures that haven’t begun operations, have no revenues or have negative cashflow, but sometimes they offer specific loan programs with softer conditions if the venture matches certain criteria that align with some of the bank’s broader goals.
Revenue-based Financing
Revenue-based financing is a novel type of funding that is recently becoming popular. With this type of financing, the investor will provide the startup a lump sum of cash in exchange for a percentage of future revenue. The amount of the investment and the percentage of revenue will be determined based on the perceived risk involved and the potential return on investment.
One of the advantages of revenue-based financing is that it does not require the startup to give up any equity in their company. Additionally, there is no fixed repayment schedule, which means that the startup only has to make payments when they are generating revenue. However, one of the disadvantages is that if the startup fails to generate enough revenue, they may find themselves in debt to the investor.
Angel investors or business angels
Angel investors are usually professional, accredited business investors that are not necessarily associated with a larger company or fund. They invest their own money into your venture, and are often willing to take bigger risks on businesses they're passionate about. Adding angel investors may require you to cede some ownership and control over your company, but they can provide invaluable resources and connections as well.
Venture Capital investments and Venture Funds
Venture capitalists are typically organizations or individuals that invest in companies in exchange for equity. They will provide the startup with the capital they need in exchange for a percentage of ownership in the company.
One of the advantages of venture capital is that it can provide a startup with the large amount of capital they need to grow quickly. Additionally, a venture capitalists tend to have a lot of experience and resources, including a broad network of connections that they can share with the startup.
However, one of the disadvantages of working with a venture capitalist besides giving up equity is that VCs will pressure startups to grow fast, because they have a fixed-term horizon for an exit. This put hiring pressure on the venture and an increased workload which can lead to mistakes.
Equity Crowdfunding
Equity crowdfunding is a type of funding that allows startups to raise capital by selling equity in their company to many investors. With this type of funding, the startup will post their investment opportunity on an online platform, and investors can choose to purchase shares in the company. The amount of money that can be raised through equity crowdfunding will vary according to regional regulations, and oftentimes it is considered extremely risky for investors for lack of proper regulatory oversight.
One of the advantages of equity crowdfunding is that it allows startups to raise large sums of money quickly. Additionally, it lets startups tap into a broader base of investors, thus retaining more control in the founding team. However, one of the disadvantages is that having such a broad base of unconnected investors means giving up on the knowhow and the resources of a specialized investor.
Initial Public Offering (IPO)
An initial public offering (IPO) is when a startup sells shares of their company to the public through a stock exchange. This can be a great way to raise a large amount of capital quickly, but it also comes with a lot of regulations and restrictions. IPOs are often only an option for larger startups that have already achieved a significant amount of success.
Government Grants
Government grants are another type of funding that is available to startups. Government grants are typically awarded to companies that are working on developing new technologies or products. The amount of the grant depends on the government agency that is providing the funding.
One of the advantages of government grants is that they do not have to be repaid. Additionally, government grants can provide a significant amount of funding. However, one of the disadvantages is that government grants tend to be very competitive, and there is no guarantee that your startup will receive one. Additionally there might be strings attached in terms of governance and sustainability practices.
Venture Debt
Venture debt is a type of funding that allows startups to borrow money from private investors. With this type of funding, the startup will receive a loan from an investor, and they will agree to pay back the loan with interest. The amount of money that can be raised through venture debt depends on the terms of the loan. Similar to any other debt, it comes with pros and cons, but one typical characteristic is convertibility into equity.
Incubators/Accelerators
Incubators and accelerators are programs that provide funding, resources, and mentorship to startups. These programs typically last for a few weeks or months to a year.
One of the advantages of incubators and accelerators is that they can provide a great deal of resources and support to startups. Additionally, these programs can often provide access to investors as well as small seed capital in some cases. However, one of the disadvantages is that these programs are very competitive, and not all startups will be accepted.
Private Equity
Private equity is a type of funding that is provided by professional investors and/or wealthy individuals. With this type of funding, the company will sell shares to investors in exchange for capital. The amount of money that can be raised through private equity depends on the terms of the deal. In principle, this is similar to Venture Capital, but reserved for more mature companies with positive cashflow and stable operations.
Finding Venture Capitalists or Venture Capital Firms
Back to the topic at hand, there are many ways to find potential investors for your startup. One way is to attend startup events, such as meetups, pitch nights, and conferences. Another way is to use online tools, such as AngelList and Crunchbase. You can also reach out to your personal network of friends, family, and acquaintances. And finally, you can hire a professional service, such as a consultant or investment bank.
When you're looking for investors, it's important to remember that not all investors are the same, as we mentioned earlier, keep in mind the type of financing you want and the type o investor that provides it.
The importance of Networking
One of the most important things you can do when looking for investors is to network. Networking allows you to meet potential investors and build relationships. When you have a good relationship with an investor, they are more likely to invest in your startup. Additionally, networking can help you learn about different types of investors and what they are looking for.
When you're networking, it's important to be genuine and authentic. Don't try to sell investors on your startup; instead, focus on building a relationship. Additionally, don't be afraid to ask for advice. Many investors are happy to help startups, and they may be able to provide valuable insights.
Another helpful article that sheds light on the relevance of networks is Invest in Lines, Not Dots.
How to attract the right business investor
To attract the right investors, you'll need to have a clear understanding of what investorrs are looking forThis means having a well-defined business model, a detailed growth plan, and a solid management team. You should also be able to articulate your company's competitive advantage and why you're the best team to execute on your vision. In addition, it's important to have realistic financial projections and a clear understanding of the risks involved in your business.
One of the many factors to consider when looking for investors is the industry, because different industries involve different levels of risk and competition. When starting a business, keep these factors in mind and work hard to convince potential investors of your company's stability and growth potential.
Hiring a consultant or investment bank
If you're having difficulty to find investors on your own, you may want to hire a professional service, such as a consultant or investment bank. These services can help you identify potential investors and navigate the fundraising process. Check out Trustventure’s Fundraising Services to get an Idea of what’s possible.
What are the most common mistakes startups make when seeking investment?
One of the most common mistakes startups make when seeking investments is not doing enough research on their potential investors. It's important to make sure that you're familiar with an investor's track record and portfolio companies before approaching them. Additionally, you should have a good understanding of their investment criteria and whether or not your company fits within that criteria. Another common mistake is not having an adequate pitch of your own business. This means that you should be able to articulate your business model, growth plan, and competitive advantage in a clear and concise way. Finally, it's also important to make sure that your financial projections are realistic and that you have a clear understanding of the risks involved in your business.
How to approach potential startup investors
One of the best ways to approach potential investors is through a referral. If you have a friend or acquaintance who is already invested in a similar company, they may be able to introduce you to relevant investors. Similarly, you can be referred by a consultant or investment bank. Once you've connected with potential investors, you should reach out to them and send them additional information about your company, such as your business plan and financial projections. Finally, it's important to remember that not all investors will be a good fit for your company, and you should only pursue those who you believe are a good match. Quality over quantity. It is worth mentioning that cold intros, that is, reaching out without a proper referral is possible, but has a lower success rate. Do it only as a last resort.
The importance of a good pitch
Your pitch is one of the most important aspects of your interactions with potential investors.
This is because your pitch will serve as an introduction to your company and it will give investors their first impression of you and your business. Therefore, it's essential that your pitch is well-crafted and that it covers all of the key points that investors will want to know about your business. In addition, your pitch should be clear, concise, and persuasive.
What to do after you've secured funding?
After persuasion and verbal investment commitment from an investor, the first thing that should be done is to prepare a term sheet that defines the terms of the investment. This term sheet provides clarity for both the company seeking funding and the new investor so that expectations are set in advance. The term sheet should cover valuation, voting rights and equity split between the new and existing investors or founders.
Once you've secured funding from investors, it's important to stay in close communication with them. This means sending regular updates on your company's progress and sharing any relevant news or developments. Additionally, you should keep them updated on your plans for increasing growth and profitability. Finally, it's also important to show appreciation for their investment and to let them know that you're open to their feedback and input. Maintaining healthy relationships with investors is critical for long-term success.
Final thoughts on finding investors
It is undeniable that finding the right type of investment and the ideal investors for your startup is essential for long-term success. The first step should always be attending startup events and pitch contests, searching for investors online, and having a well-crafted pitch. Taping into your network is the best move overall, as referrals and proper connections are important since you will have to build a long lasting relationship with investors. These relationships have to be properly cared for, with honest communication, transparency about your company's progress, and showing appreciation for their input.
Need help in attracting investors to your startup?
Startups frequently wonder what is it that investors look for when considering whether or not to invest. Your startup's likelihood of success or failure largely hangs in the balance of your capital, which makes attracting the right kind of investors critical to your venture.
Fortunately, you can increase your chances significantly by getting a professional business valuation done - and with Trustventure we make things easy by putting you in touch only with accredited professionals. If you're interested in learning more about our services, please don't hesitate reach out to us today!
