How to Get Investors: Everything You Need to Know
Knowing how to get investors is important if you are starting a company. Companies have launched all aspects to get in contact with investors.8 min read
How to Get Investors
Knowing how to get investors is important if you are starting a company. Companies have launched specific platforms that provide research, information, and assistance with all aspects of getting a business started, including ways to get in contact with investors.
Companies, like Startups.co, are providing a convenient channel for locating investors in an efficient way. As of July 2015, Startups.co has 13.9 million members, which makes it the biggest startup community in the world and delivers an extraordinary opportunity to get in front of some investors in your space for both funding through Fundable and mentoring.
Another up-and-coming startup platform is Gust with $1.8 billion already invested in startup businesses.
Angel investors may be professionals such as lawyers or doctors, former business associates or even professional entrepreneurs interested in helping out the next generation. Angel Investors are affluent and willing to invest a lot of money in your business in return for a piece of the action.
Angel investors give you money, and you sell them equity in the company, filing the investment raise with the Securities Exchange Commission (SEC). Angel investor will not only invest in your startup, but will also sit on your shoulder, offering solid advice, mentorship, and provide entrance to their network of contacts.
Places to start include Angel Capital Association, Funded.com, and Angel Investment Network, all of which have thousands of angel investors who provide information on the type of investments they are seeking. To help you find a regional angel investor near you, Angel Capital Association even offers a directory listing by area and platform type.
City Chamber of Commerce groups have started to partner with angel investors to help stimulate new business opportunities for that city, including in areas like Los Angeles, New York, and Chicago.
Angel investments may be ideal for businesses that are reputable enough that they’re beyond the startup phase, but are still early enough in the field that they require capital to develop a product or fund a marketing strategy. One disadvantage is you could be giving away anywhere from 10 to more than 50 percent of your business to the Angel Investors. There's always the risk that the Angel investors will decide that you are the business' greatest obstacle to success, and you could get fired from the company you created.
Another way to find the right investor for your startup: Crowdfunding Sites. Crowdfunding sites provide you with contact to many diversekinds of investors – from the general public with an interest to participate in the “next big thing” (Pererbackers, Kickstarter, and Indiegogo) to philanthropists who believe in helping others realize their dream (RocketHub), to accredited investors seeking new ideas to fund such as OurCrowd.
Each crowdfunding site has its own focus and way of incentivizing investors, so study each one carefully to see which one most closely aligns with your strategic goals and vertical.
Incubators & Accelerators
Working with an incubator or accelerator gives you a whole host of investor resources to watch that business grow up and succeed. The Incubators & Accelerators are primarily interested in taking on a bigger role to help change your idea into a feasible business model as well as offer the funding sources to make it happen.
The incubators and accelerators offer a physical space to set up your office, making it easy to work with you directly. The National Business Incubation Association (NBIA) has a directory listing to help you find a business incubator member.
In exchange for funding, incubators and accelerators may want a piece of your startup, so you will need to decide how much you are willing to give up.
Small Business Administration
The Small Business Administration are still a good source for money because more programs have been established in recent years to fuel the economy.
Small Business Administration primarily offer small business loans and grants, but these may be exactly what you need and are available with fair terms without having any interference or expectations that they will get a stake in your business. Small Business Administration loans are almost always applied for and administered by local banks. The Small Business Administration works with “certified lenders,” which are banks.
If your own bank isn’t a certified lender, you should ask your banker to recommend a local bank that is.
Professional Social Networking Sites
Numerous professional social networking sites have launched that can help connect you with all types of investors across all industry specializations and business segments.
Many of these new professional social networking sites even connect you with investors from other countries who want to participate in the global business environment and often bring your product or service to their part of the world.
Some professional social networking sites to consider for investor connections include EFactor, Xing, Plaxo, Startup Nation, Cofoundr, and Meetup.
Private Equity Firms
Private equity firms give you access to everything from a few thousand to millions in investment, primarily to those startups considered to be in the early stage with great growth potential across a wide range of industries.
The objective of these Private Equity firms is to sell their stake a few years after investment to reap a significant profit from investing in your startup. According to Private Equity Network, private equity firms invested $347 billion in 2012 across nearly 2,100 companies in the U.S.
Online Lending Platforms
With the incredible restrictions now involved with getting bank loans for a startup, new solutions have emerged through the advent of online lending platforms that serve a similar function.
Lending platforms can be peer-to-peer, non-traditional lending sources, or large investors looking to help out small businesses and profiting from the lending terms. Some trustworthy online lending platforms include TrustLeaf, Prosper, OnDeck, and Lending Club.
Personal Marketing Effort
Putting yourself where investors are sure to find you, including:
- Social networking sites
- Conversations on Quora
- Guest posts on established blogs
- Personal blog posts
- Traditional media outlets
Friends & Family
Finding an investor in a friend or family member isn't a hard sell because they already believe in you and are passionate about helping you succeed.
Keep your professional and personal relationships as detached as possible by getting everything in writing and evidently explaining the risk involved in investing in a startup - and be sure they comprehend they could lose their investment.
Don't risk losing friends or family over investments.
7 Keys to Getting the Money
If you’ve never started a business before, and if you’re approaching people who’ve never invested in a business before, keep your business model as simple as possible.
Ask yourself whether or not people can “buy” you as the leader of your business. Use a tried and tested template that includes everything from build-out costs to profit projections, based not on theories, but actual businesses using the exact same model which will give investors a lot of comfort.
Research on the community to determine the viability of operating a business there and develop a solid local marketing strategy as well as a management model with policies and procedures. Create a healthy, long-term relationship with the investors and keep their expectations realistic.
Limit the amount any individual could invest to create an opportunity for more people to make a generous return on their investment while maintaining control over the businesses.
Give the investors a lot of comfort by carefully planning what would happen if the business failed or when the business is eventually sold.
Small business financing myths
- Venture capital is a growing opportunity for funding businesses.
- Bank loans are the most likely option for funding a new business.
- Business plans sell investors.
Types of Investment and lending: Venture capital
Venture capital shouldn’t be thought of as a foundation of backing for any business except a very few extraordinary startup businesses.
Venture capital can’t always invest in startups unless there’s an unusual blend of market opportunity, product opportunity, and proven management. A venture capital investment:
- Needs to have a sensible chance of producing a tenfold increase in business value within three years.
- Must center on newer markets and products that may sensibly project increasing sales by large multiples over a short period of time.
- Must work with established managers who’ve dealt with successful startups in the past.
Individuals in multimedia communications, new growth industries, biotechnology, or the far reaches of high-technology products, usually know about venture capital and its opportunities.
Types of Investment and lending: Commercial lenders
Banks commonly make loans to small businesses backed by the company’s inventory or accounts receivable.
Banks aren’t supposed to invest in companies and are firmly limited in this respect by federal banking laws. The government stops banks from investing in companies because society, in general, doesn’t want banks taking savings from depositors and investing in dangerous business ventures; obviously when (and if) those business ventures fail, bank depositors’ money is at risk.
A business that has been around for a few years generates enough stability and assets to serve as collateral.
A great deal of small business financing is accomplished through bank loans based on the business owner’s personal collateral, such as home ownership, as home equity is the greatest source of small business financing. Startup businesses are not safe enough for bank regulators, and they don’t have enough collateral.
Types of Investment and lending: Other lenders
A reputable small business may also turn to accounts receivable specialists to borrow against its accounts receivables.
The most common accounts receivable financing is used to fund cash flow when working capital is tied up in accounts receivable. Interest rates and fees may be relatively high, but accounts receivable financing is still often a good source of small business financing.
Additional related business practice is called factoring
So-called factors actually purchase obligations, so if you have a customer that owes you money, you can sell the related paperwork to the factor for some percentage of the total amount then the factor takes the risk of payment.
Words of warning
Never spend somebody else’s money without first doing the legal work properly and have the papers done by professionals, and make sure they’re signed. Never spend money that has been promised but not delivered as companies get investment commitments and contract for expenses, and then the investment falls through.
Submitting a plan
The information an entrepreneur submit to investors depends a great deal on what their objective is.
The entrepreneur has to have the complete business plan ready to go as soon as the investors or lenders ask for it.
If an entrepreneur is looking for lease financing, receivables, or a bank loan, they have to submit a loan support document to the lender.
Fundamental reasons why only 5 percent of all entrepreneurs get funded
The system for evaluating entrepreneurs is arbitrary and inefficient. The methodology investors employ to find and qualify a potentially viable entrepreneur places almost all the responsibility on the entrepreneur.
Entrepreneurs don't understand the difference between having a need for capital and being ready to ask for it. When an entrepreneur is driven by a strong sense of need, they either ask the investor to save or bail him out of his bad management of the limited capital he had or because he is unwilling to invest/raise any more money.
When an entrepreneur has "done their homework" and truly understands what it takes to run a business it means he is ready for a partner, he can handle his customers and is ready to accept an investment that will help him grow. Entrepreneurs often struggle over whether to fork over their own money versus paying someone who won't deliver, leading to a freeze on progress and a slow painful death of their vision.
The entrepreneurial industry is flush with charlatans just waiting to take advantage of a vulnerable entrepreneur. Many entrepreneurs with absolutely stellar ideas simply don't understand that building a business requires tons of sacrifice (including money), and they're just not willing to pay the price.
If investors do not see that entrepreneurs demonstrate their willingness to put their money where their mouth is and should believe in their vision enough to invest their own hard-earned cash then investor's won't invest either. Entrepreneurs should not hire anyone without checking their references thoroughly.
Entrepreneurs should be wary of "guarantees" and should look for resources that will take a part of their reward based on the success of their service so that they know they must perform to get paid a lot of money.
If you need help with getting investors, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.