They say it takes money to make money.[cite::219::cite] Now, this may not be true for all things, but it certainly is for starting a business. So, where does an entrepreneur or small business owner find funding? Investors? Well, investors generally don’t like to invest in a company when it’s in the early stages of either prototype or beta testing.
The first place most people start when looking for capital for their business is within their “circle of influence,” i.e. friends and family. And why not?! Your friends and family love you and want to see you succeed, so generally, they are more than happy to help you out. Remember, they are investing in YOU rather than your business.
Now, once you get your company off the ground, you are going to need some real financing to sustain and continue your business’ growth. The next easiest place to secure funding is a bank, in the form of a loan or a line of credit. Once this money has been secured, your next step, as a business owner, is to find investors. Just a heads-up, investors mean more to your business than just securing financing. They often offer a wealth of knowledge and a considerable amount of connections for your business to utilize. Bottom line, investors want to see you succeed because they would like to see their ROI come to fruition. So, let’s look into the different types of investors: angel investors and venture capitalists. But, what’s the difference?
Angel Investors versus Venture Capitalists
- Angel investors make decisions on their own, whereas VCs will have an investment committee that will work together to make a decision to maintain objectivity when investing.
- Angel investors typically invest between $25,000 and $100,000 of their own money, whereas VCs will, on average, invest $7 million.
- Angel investors will rely on you to run your business, whereas a VC will generally require having a member present on your company’s board.
To sum it up, angels are typically well-off, well-connected individuals. They use their own money to invest in companies and don’t come with the constraints of working with VCs, such as: they don’t go on boards, they don’t need to put in lots of capital (in fact, they usually don’t want to), they prefer dead simple terms (as they often don’t have legal support), they understand the experimental nature of the idea, and they can sometimes decide in a single meeting whether or not to invest.1 Where a VC is ideal, is if you need a considerable amount of money and would like guidance for the direction of your company. At the end of the day, both types of investors are going to want to see a 20-30% return on their investment per year.
So, let’s talk about strategy. How do you secure investments for your growing business?
First, you have to understand that having a “good idea” is not enough.
You must create a comprehensive business plan that highlights the “proof of concept” for your venture. An entrepreneur who can demonstrate that he/she can create paying customers in the real world is far ahead in terms of raising from investors than the entrepreneur who simply has a business plan and an idea.2 Additionally, you must distinguish your business from the rest. Investors today are looking for ways to diversify their portfolio, so you need to show them how your company or program can do this.
Second, find investors that are right for you. Many investors have a preference on when they will invest. They may prefer getting in on the ground level or want to wait until you have a proven model. Furthermore, investors that you’re pitching to may have an industry that they are familiar with and would prefer to invest time and money in. Bottom line, do your due diligence and research who/what group you are pitching to for funding. Remember, many investors at one time or another were in your shoes and made it as a successful entrepreneur.
Third, be memorable. Considering that most investment decisions are made with thought and deliberation, you will not have done enough by purely getting in front of potential investors. You must stay in the mind of your potential investors through an up-to-date website and ongoing marketing, such as with a drip email campaign.
If your strategy involves starting with angels and then going to VCs, keep in mind the following: 1) Angels and VCs will usually want 20-30% of your equity for their investment so be sure to keep enough equity available for additional investors. 2) Make sure your documentation is VC friendly. Use standard term sheets (check out nvca.org for a good template). Your deal should look as much like other deals in terms of incorporation, term sheets, board structure, etc. in order to be attractive. 3) Try to eliminate or minimize the participation of non-accredited investors in your deal. Even though you can legally have a certain amount of non-accredited investors in certain types of deals, it’s best to leave them out if you’re going the VC route.1
Elite entrepreneurs never actually stop fundraising because they look to raise more money than they need so that they aren’t forced to raise money at inopportune times. Additionally, they don’t look at VCs as the last option for funding. Elite entrepreneurs look to get funding from the available resources to scale rapidly and own the market, without concern for comfort or ease in the fundraising process.
Raising capital IS a process and WILL take more time than you may anticipate. So, good luck, stay positive and remember to stay eager and relentless.