Investors are unique players in the growth process of a business. The level and quality of their involvement can ultimately help determine a company’s success or failure. It is imperative for budding entrepreneurs to take the time to learn about the types of investors available and how to use best practices when approaching them for funds.
5 Types of Investors
Investors can be called upon during almost any stage in the life of a startup. Below are five of the most common types of investors, as well as recommendations for when they should be considered.
Banks are a classic source for business loans, Inc. explains. Loan-seekers will usually be required to produce proof of collateral or a revenue stream before their loan application is approved. Because of this, banks are often a better option for more established businesses.
Angel investors are individuals with an earned income that exceeds $200,000 or who have a net worth of more than $1 million. They are found across all industries and are useful for entrepreneurs who are beyond the seed stages of financing but are not yet ready to seek out venture capital.
Peer-to-peer lenders are individuals or groups that offer funding to small business owners, Time reports. To work with these investors, entrepreneurs must apply with companies that specialize in peer-to-peer lending, such as Prosper or Lending Club. Once their application is approved, lenders can then determine the businesses they wish to support.
Venture capitalists are used only after a business begins to show a significant amount of revenue. These investors are notable, as they usually invest a substantial amount of money (often around $10 million). They gain most of their returns through “carried interest,” or a percentage received as compensation from the profits of a hedge fund or private equity.
Business owners often rely on family, friends or close acquaintances to invest in their companies, particularly in the beginning. However, there is a limit to how many of these individuals can invest in startups because of legal limitations, Legal Zoom explains. While it may be easy to convince loved ones to help, thorough documentation is highly recommended.
How to Find the Right Investor for Your Startup
Understand the different investment options you have
When trying to begin a company, entrepreneurs can acquire capital through means other than investors, Forbes explains. Personal savings and personal borrowing are two common avenues of doing so.
Personal savings generally come in two forms: cash and cash-equivalent savings, and retirement accounts. Using your personal savings can be useful. The required money is already on hand, and there is no need to go into debt to obtain it. However, the personal savings option may also be a difficult avenue to pursue. Quite often, entrepreneurs seek out investors in the first place because their personal savings simply aren’t substantial enough for their needs. It is also personally difficult for many people to gamble with money they may later need for other purposes, such as retirement, college funds for their children or personal debts.
Personal borrowing is useful for entrepreneurs with particularly strong credit scores (700+) and a high personal net worth. To obtain capital for their new business, these individuals may take out a personal loan or apply for a new credit card. The risk (as with borrowing of any type) is the possibility of falling behind on payments, lowering your credit score and sinking further into debt.
Decide what you want from your investors
Choosing an investor is about more than simply trying to acquire funds. It also implies a certain level of commitment. You should take stock of the expertise you need and the expectations you have before deciding to approach a particular investor, according to Entrepreneur. When it comes to potential investors, you should consider their recent dealings, the services they might provide, the expectations they have for company leaders and how involved they want to be in company operations.
Know where to look
Although finding investors may seem daunting, it only requires searching in the right place. You can take advantage of investor databases such as AngelList, Angel Capital Association or Angels Den to get started. Self-promotion also helps. Writing blog posts, networking and participating in community business activities can result in investors going after entrepreneurs instead.
Create an investor shortlist
To improve your chances of gaining funds, you should narrow down your list of potential investors to only those who seem appropriate. Criteria for this list can be items such as the investor’s previous partnerships, reputation or any mutual connections. The list should include around 30 to 50 names, which you can put into a spreadsheet with other relevant information for easy reference.
Look at your networks
Investors are looking to reduce risk, which means they are more likely to have interest if they know you or if you have been highly recommended. Examine your professional networks to comb for potential connections with the investors in question and carefully consider the right person to help make introductions.
Perfect your pitch
Once you have an investor’s attention, a sales pitch is your chance to clinch the deal. It (literally) pays to prepare. Think of the selling points that speak best to the unique audience you’re approaching. Create a “hook” at the beginning of your pitch and make sure it leads into a discussion of how your product or service will solve a problem. It’s also important to have a clear business plan and discuss how the investor will profit.
Ultimately, entrepreneurs who take the time to find investors tailored to their specific financial and operational needs will build the foundation needed for a long and successful partnership.
Getting to Know Investing
Individuals wishing to understand the complexities of modern company financing can earn an online business degree from Point Park University. The online Bachelor’s in Business Management features an entrepreneurship concentration, while the online MBA allows students to become experts in the business field. Both programs are designed for maximum flexibility, allowing students to develop real-world skills on a schedule that best fits their needs.