Learn how to Attract Investors, what to offer and how the inner workings of dealing with investors in a small business.
Are you planning a startup, and you are still in the process’s initial planning and research stage? It is good that you take your time to learn everything you can before taking the final steps! At this point, you might be searching for common answers to questions like what to offer investors small businesses – this is understandable.
For example, suppose you plan on starting a small business but understand you need investors to raise capital. In that case, you will want to know everything you can about this process, so you are not blindsided later.
Starting a business can seem like a daunting task with many different steps to take and rules to follow. However, it is easiest just to take one thing at a time and break it all down. So today, we will look more into what a startup will need to offer to investors to entice them.
How To Find Investors For Your Startup
There are many different types of people and institutions that you can tap for money for your startup. Bank loans and loans or investments from family, friends, and acquaintances are pretty popular. They are a great way to get some early cash, especially if the business you are starting does not need a lot.
However, we are going to focus on finding investors that are people you do not know. These people or organizations have no pre-existing relationship with you, nor are they loyal.
Before deciding to invest, they do not have any reason to want you specifically to succeed. These are the type of larger investors we are going to discuss today!
You can not really get the point of answering what investors expect in return for their capital until you know how to find them. We need to do this one step at a time.
- Private Investors – There are many places you can find private investors. Some things you may want to try include: contacting personal and professional contacts for names and ideas, your local chamber of commerce, online and local business community groups, or local trade associations related to your future business.
- Angel Inventors – Angel investors can also be found through networking efforts and various websites, chats, forums, and groups online.
- Venture Capitalists – Most venture capitalists have a large internet showing; you can search for them on their own websites, blogs, and social media pages. They will often tell you exactly what types of companies they are currently in the market for! You can also visit industry or local events where they will undoubtedly be looking for new talent.
- Accelerators – search the internet for popular or niche accelerator programs and see if they fit into your business model.
Unique Ideas to Find Investors
The above section went over some basics for the top 4 types of investors outside of established relationships you might have. However, you might be interested in finding some more unique ways to find investors – get ideas below.
- Visit a Business School – This may be an idea you have not heard of or even considered. Going to a business school (or even the business department of a large college or university) might help you land your first investor. No, you do not need to enroll! However, top business schools and business programs usually have entrepreneurial programs. You can call and set an appointment to pitch your idea. They may either be able to help you find investors or assist you in fine-tuning your concept. This will help craft it into the perfect business plan for you to get investors easier.
- Attend Start Up Events – Another idea is to attend startup events. Go to all the local events you can find to locate investors.
- Through Networking – Networking is an excellent way to find investors. Even if you ask family and friends to put you in contact with potential investors, this is not the same as getting family and friends to invest. They are just providing you with the introduction. Start with people in or near your field. However, do not limit yourself to your field, as most investors enjoy a diverse portfolio.
- Check Out Government Programs – Some government programs are suitable for you to apply for the money. For example, one program is to financially assist startups with money. In contrast, the other one is to connect you with suitable investors.
- Websites Like LinkedIn – LinkedIn is a website many people use to network and make business connections they otherwise would not be able to do independently. On LinkedIn, you can connect with other entrepreneurs, mentors, and investors.
- Crowdfunding – There are multiple crowdfunding websites on the internet where you can easily set up a campaign to raise funds for your business. However, be careful because if you share too much and your idea is super unique, someone could steal it. Crowdfunding can also be used when you are about to open your business to generate buzz about your business.
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What Do Investors Need to See to Consider Giving a Startup Money or Capitol?
Investors need to really want to invest to pull the trigger. They are not just going to give their money to anyone, so it is essential to understand precisely what they are looking for. If you know the answer to this question before taking a meeting, you will have a much greater chance at success.
- Background and Experiences in The Industry – Investors want to know that you know what you’re doing. You should have an education or a work history in the field your company is in. If not, you will need an excellent staff that brings that to the table and an explanation on why you are still qualified to run your company without experience.
- A Unique Company or Product – There are millions of companies and products for investors to give their money. Why is yours special? What makes your offering unique and something they can proudly attach their name to?
- Large Market Size – Although all companies would like to control the market they are in and be the most popular company in their niche, the likelihood is low. So it is crucial to have a large base of potential customers. Even if your market share is on the lower side, you will still have a profitable business.
- Hard Data – The numbers speak for themselves. Make sure you have adequately researched everything and are ready to give then numbers, stats, percentages, and figures on everything, along with where this information came from.
- Killer Business Plan – Your business plan will, of course, include all the numbers and data, but it is more than that. You will need to understand everything you plan to do, every step to get to your goals, and how to counteract any problems you meet. This would include: who your market is, how to effectively target them, different sales channels, a marketing plan, understanding your competitors and how you will beat them, and timelines for everything.
- You and Your Team – Everything can be absolutely great about a business idea. Still, if you and your team do not impress the investors, they will walk away. So many people can come up with a good idea, few can properly manage it, the business, staff, and customers. This is the part where you need to shine and make them want to invest in you as a person even more than your business.
- A Financial Plan – Finally, you need a financial plan. This plan should include: where the money is going, how much you will need for each step, including how much cash on hand you will need to effectively run the business weekly, monthly, quarterly, and yearly.
What Do You Need to Offer Different Kinds of Investors To Get Them To Sign On With You and Your Startup?
There are many different ways that you could pay investors in a company. Still, partial ownership of the company is a significant way investors get paid. This is a big reason why they are choosing to invest.
You provide the idea, expertise, experience, hard work, and day-to-day activities, but you still need money. Without money, your company is going nowhere, and investors know this.
Unfortunately, this means that they will be asking for a large chunk of your company in return for their investment.
Here are some basic ideas of what you can expect to give up for this much-needed investment.
Venture Capitalists – Venture capitalists are usually putting up a lot of capital. Suppose you have a company with a considerable startup cost or a rapidly growing company, and you need a lot of money. In that case, you may turn to venture capitalists for assistance. You can probably find a venture capitalist group to invest in your company, but the cost could be high.
Of course, this will vary between groups and companies based on many factors, including how much money you need. Still, venture capitalists usually expect somewhere between 20 – 55& of your company in return.
It is important to note that when you are looking at these kinds of numbers, they take a vast upfront risk that does not always pay off for them. They, of course, want every investment they make to pay off, but that is just not feasible.
So, the hope they have is that some of these companies, a very small percentage of them, will succeed and pay for all the bad investments.
As far as investments go, giving up 20% equity of your company is pretty standard. Still, if you need to give more than 35%, you might want to really think about it and if there are any other options open to you.
Angel Investors – Angel investors, have the money to invest in a variety of companies. To qualify as an angel investor, they need to either make at least $200,000 annually or have a net worth of at least 1 million dollars.
Typically, an angel investor will take between 20 – 25& of your business’s equity in return for their investment. However, this number can go as high as 40%, depending on the risk factors and just how much money you need.
One of the positives of using angel investors is that they are taking all the risks. If your company goes under, you have nothing to pay back, and they take the loss. This is why it is acceptable for them to ask for such a high equity percentage. Typically, they invest in multiple companies hoping for one or two to become successful.
Private investors – Private investors are usually not part of a venture capitalist group, nor does their overall income or net worth qualify them to be called angel investors. However, not all businesses need hundreds of thousands of dollars to be invested, so individual private investors can be used when required on a smaller scale.
So if you need a small amount of money, you might get a private investor who determines how much equity they want in return based on the investment. You may be able to only give up 10% of your business, but they may still ask for 20% or more. There are a lot of factors here, including your ability to negotiate.
You might negotiate a smaller percentage of equity in your company if you only need a small one-time investment and if you will not need more money from them down the road.
For instance, if what you need is less than $50,000, and especially if it is under $25,000, it will be much easier to negotiate 10 – 15% equity. It will be even easier if you expect the products or services you sell to have a large profit margin.
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You came into this article searching for what to offer investors in relation to small businesses and startups. Hopefully, you have learned how much equity of your startup you will need to give to different investors.
You should also have a better understanding of finding different investors and precisely what they will be looking for. This will enable you to find the best investors in the quickest amount of time.
Bijay is an entrepreneur and start-up founder having more than 14 years of IT industry experience. He is the co-founder of TSInfo Technologies, a SharePoint development company.
A dedicated professional and very passionate about public speaking and also wrote thousands of technical blogs in various technologies. He also wrote a lots of blogs on entrepreneurship, investment, startup, business, manage money tips, etc.