The Ultimate Guide On Finding Investors For Your Business
Author: Brent Davis
For many small businesses taking on investors is an essential process.
Many banks are reluctant to take a risk on start-ups with no parent companies and even established small businesses. This leaves entrepreneurs with very little choice but to look for investors who are willing to back their ideas.
If you’re new to the world of start-ups and investing then the process can seem overwhelming. We won’t sugar coat things, it really can be overwhelming, even for those of us that have gone through it dozens of times. It can also be a time-consuming process and there is no guarantee of success.
So, why do so many people put themselves through this stressful process?
Well, it can have huge rewards – for both the business owner and their investors. Backing the right idea can lead to huge returns on investments. If you have a good idea for a business then it is very likely that someone out there will be willing to take a risk on you.
However, many people are unsuccessful in this process because they approach it in the wrong way. They either pitch to the wrong people, or they pitch way too early in the development process. Doing either of these can lead to instant rejection.
Even if you are successful in finding investors, you can also run into problems. Inexperienced entrepreneurs are often so desperate to find an investor that they take on the wrong type of investor.
Or even worse, they oversell the potential of their business and are left with a lot of angry investors who have lost money on them.
How can this guide help you?
This guide is going to help you streamline the process of finding investors for your business. It will help you to map out exactly what you need to do to be successful in this endeavor.
We will be talking you through the pros and cons of bringing on investors. We will be explaining the different types of investors that your business can take on. We will be looking at how to attract the right investors and what these investors will be looking for.
We will then be covering the most important part of this process – putting together a comprehensive business plan that wins your investors over. We will talk you through how to pitch to investors before covering a few alternative forms of capital acquirement.
Most importantly this is a guide that is designed not just to get you an investor, but to help you find the right investor for your business.
Pros & Cons Of Business Investors
If you’re reading this guide, then you probably have your heart set on finding investors for your small business. We are not planning to try and talk you out of this. However, we want to share some of our experience of working with investors as a small business.
While taking on investors can be the difference between a pipe dream and a fully-fledged small business. We think that entrepreneurs should take the time to educate themselves on some of the downsides of working with investors.
That way you will be completely aware of what you are getting yourself into.
An investor is someone who provides capital in exchange for partial ownership in a business. If the business has any financial struggles later down the line, they can take on new investors or trade ownership for more capital from their current investors.
This type of investment not be confused with or treated as a loan.
The pros of taking on investors
Many of us don’t have the capital that is required to launch a small business. Taking on investors can be a better option for many of us when compared to taking on bank loans.
Having investors backing you can remove a significant amount of financial pressure and give you time to establish your brand. Bank loans require repayment no matter how well the business is doing.
Many small businesses with loans are unable to reach their full potential before running out of capital. Taking loans out can also stifle growth in the long run particularly if your business has high overheads.
Investors take a share of the profits, rather than eating into any form of money made like loan repayments do. Investors also do not charge interest.
Investors take a risk when investing in companies. If you take out a loan you will have to repay it whether your company is successful or not. Investments are not required to be repaid if the business fails.
A silent investor is a name the industry uses to refer to as investors who want to fund the company but who have no interest in getting involved in the day-to-day running of your business. Many businesses thrive with the help of silent investors.
The cons of taking on investors
While this system does have many positives, the process is not always smooth sailing. Taking on investors can have some real downsides, especially for inexperienced business owners.
Many businesses are not able to find silent investors, this can result in the company being put under a lot of pressure to produce growth.
As we mentioned, for an investor supporting a company is a risk. One that could really pay off, or one that could lose them a lot of money. Because of this, they tend to want to see faster rewards than a bank would.
And they will often push for short-term growth that may not necessarily benefit the business in the long run.
This kind of pressure can make a business an unpleasant place to work. And the stress caused by the investors tends to trickle down through every level of the company.
Furthermore, if you decide to take investment from friends and family you may notice a change in your relationships. Especially if your business is struggling.
One of the most important things you can do when pitching to your investors is, to be honest with your profit predictions. Every business takes a different amount of time to start turning a profit.
If you give them a realistic idea about how long you will be running at a loss for they are less likely to pile on the pressure when you don’t make them money on Day 1.
Different Types Of Investors Explained
Now that we have talked about what taking on an investor really involves, let’s move on to looking at the different types of investors that are out there.
As a small business, you should be aiming your pitches at two main types of investors; Venture capitalists and Angel Investors. In this section, we are going to cover what these investors are and how they can benefit your business.
We will also briefly talk about another type of investor you may want to consider.
Venture Capitalists
Forbes once said ‘VCs are the holy grail of investors for fundraising entrepreneurs.
They come with the biggest checks, the most power to fuel success and gaining market share, and the most juice when it comes to achieving more credibility and visibility.‘
Venture capitalists most likely to get involved in funding business ventures as early as possible.
This is where they tend to see the best return on their investment.
Venture capitalists will most likely want to take an active role in your company. Whether it is as a board member, or by taking a job at the company.
They are typically experienced professionals and can be a great asset when it comes to turning a profit quickly.
Angel Investors
If you are looking for a more small-scale investment then you should consider pitching to Angel Investors.
Like Venture Capitals they are investors that are actively looking for investment opportunities.
And they are more likely to take a risk on smaller businesses and start-ups than a bank.
More often than not Angel Investors want to be silent investors, and your business will be a small part of their larger portfolio.
This can be both good and bad for the business involved. These investors tend not to take a very hands-on approach. However, they are quick to cut their losses and move on if a company is not as successful as they had hoped.
Another option – Corporate Investors
Many larger corporations are currently looking to invest in start-ups that they think can add something valuable to the portfolios.
There are definitely some benefits to joining a larger network of companies.
But the downsides of doing this tend to outweigh the positives in the long run.
These companies have a habit of buying up smaller companies and shutting them down if they don’t perform as well as expected.
A prime example of this is the cosmetics conglomerate, Estee Lauder.
How To Attract Investors
‘Attracting Investors’ is a broad term that makes many entrepreneurs sick to their stomach. We have some good news for you – this is not as complicated as it sounds.
All this process involves is making your business as appealing as possible (to the right people) and actively pursuing the things that you want.
Here are our top four tips for attracting investors:
1. Know your purpose
It is your job to convince your investors that the world needs your business to exist. To do that you need to be clear on your company’s mission (or purpose).
As the head of the company, it is your responsibility to understand and communicate this mission. You should be able to turn it into an elevator pitch that will leave your potential investors wanting to hear more.
2. Understand the power of branding
When people think of your business, they are not thinking about the people who work for you and your warehouse full of stock. They are thinking about your brand.
Understanding your brand and its voice adds value to your company in the eyes of investors. The more time you spend developing your brand and capitalizing on its benefits the more attractive investors will find your business.
3. Take every opportunity
Mathematics tells us that the more times we try something, the more likely we are to succeed at it.
This is a rule that you should apply to your hunt for investment. Take every opportunity to speak to investors, set up meetings, and pitch your business. Not only will it make you statistically more likely to succeed.
But every meeting will teach you something new about your business plan or your pitching method. Learning these lessons will make your next pitch even better.
Remember you only need one person to say yes.
4. Don’t give up
A ‘no’ from one investor isn’t a ‘no’ from every investor. Rejection is part of the process. Some even see it as a rite of passage. You should see rejection for what it is – a small setback that you will work past.
When we’ve experienced rejection, we like to take the time to read the stories of other people who have been rejected but have gone on to do amazing things. We like to do this to remind ourselves that rejection doesn’t have to be the end of this journey.
You wouldn’t want to be any of the 12 Publishing Houses that rejected Harry Potter. Or the TV network that told Oprah she just didn’t have the right personality for television.
When the rejections come, dust yourself off and keep moving forward.
Things Investors Look For Before Investing
We can boil down what investors are looking for into one every simple point. Investors are looking for a return on their investment – i.e. they want to make money from their investment in your company.
Unfortunately, that’s not something that is always in your control. So let’s look at some elements that you can tangibly harness to make your business a more attractive investment opportunity.
Data
Investment is a risk. All investors understand this.
What that doesn’t mean however is that they are willing to invest blindly into companies.
They are looking for attractive investment opportunities with good prospects.
So, how can you show potential investments that your business is a smart investment opportunity?
With heap loads of data.
Investors want to make money, so it is your job to put together the data that will show them how they can make money with your company. This can be difficult for start-ups, but through extensive market research, you will be able to pro