Starting a new business and made it successful requires a lot of time, strategy, discipline and efforts beyond business financing. There is a variety of small business loan options for businesses to grow, and it’s certainly challenging to secure the money you need to hit the spot without significant financial credentials. Most small business don’t want to assume debt initially, and would preferably give up equity to investors—a process called equity financing. If you’re thinking about this option, you possibly craving to discover how to find small business investors.
Fortunately, you’ll find a multitude of investors willing to invest in worthy startup businesses. According to the American Angel report, 63% of angel investors live outside Silicon Valley, New York or Boston, the traditional homes of venture capital.
There might be a time when you think of bootstrapping or self-financing your startup or are just inquisitive about how to find investors for your business. Here are a few tips to help you get started on how to find the investors and how to connect with them effectively.
What Are Small Business Investors?
Small business investors can be an individual or a group of people looking for opportunities to finance startups. In comparison with venture capital firms, small business investors usually offer smaller loan amounts—though sometimes a bit higher amounts in certain conditions.
Small business investors search for companies with growth potential, after all, they are investing their money and are looking for returns, requiring something in exchange which is generally equity. While investing money into early-stage startups, investors are making what will likely be long-years bet. However, they typically are anticipating for a gateway of some kind so they can make some money, as well.
Besides funding, startups can also obtain informed perspectives from most investors, since many are former entrepreneurs. While securing funding from small business investors, there are a few important things you need to understand first:
- Angel Investors vs. Seed Money
- Accredited Investors vs. Non- Accredited Investors
- Equity vs. Convertible Note vs. SAFE Note
- Individuals vs. Groups or Associations
Angel Investors vs. Seed Money
While searching for small business investors, you might have come across this question: are you looking for a single small business investor, or raising seed money to fund their new enterprise?
Most startups prefer to secure funding from a single angel investor, but do without raising seed money. This will help you develop a close relationship with investors while retaining substantial equity in your business. Angel investors are less interested in taking board seats. In addition, raising seed money is a lot of work.
Having said that, many businesses will raise seed money of different sizes in which angel investors will contribute. You need to ascertain where you fall, and in any case, you’re hoping to likely engage with seed money beside angel investors.
Accredited Investors vs. Non- Accredited Investors
Accredited investors are financially savvy. In order to be an accredited investor, it has to meet the U.S. Securities and Exchange Commission (SEC) requirements to participate in extensive investment transactions. The individual investor must earns more than $200,000 annually or a joint annual income of $300,000 for the last two years, or have a net worth exceeding $1 million, either individually or jointly with his or her spouse, or serves as a partner, executive officer, director, or a similar role for the issuer of a security being offered.
On the contrary, a non-accredited investor is one who doesn’t meet the SEC to become an accredited investor.
Equity vs. Convertible Note vs. SAFE Note
While searching for investors, you’re familiar with the fact that you have to give up equity. In case of equity, both parties agree to an amount for the value of the company called “the pre-money valuation”. After agreeing to an amount, the next step is to settle the investment money needed to achieve the next set of company goals (called “the investment round” or “the round”).
A convertible note (“connote” if you’re cool) is simpler than a priced equity round mainly because it adjourns the need to settle a pre-money valuation of the company prior to investment. Startups can get funding without the need to repay the interest and principal, while investor gets equity for the unsettled loan amount based on future business valuation.
SAFE (Simple Agreement for Future Equity) is an alternative to the convertible note, which isn’t a debt, but it does convert into equity. It is much simpler and shorter than most convertible notes.
Both SAFEs and convertible notes can have valuation caps, markdowns, and most-favored-nations.
Individuals vs. Groups
You can find funding from a single investor. However, you will find many who choose to work in groups or associations.
This makes investing inexpensive and less risky, and it’s less time-consuming too when one person in a group exercise the draining due diligence for all.
There are many complexities involved in a group angel investing, so you should know when you’re looking to find investors from a group. The important thing is that you can find small business investors from an individual, or a group that is generally governed by a lead investor.
Proven Ways to Find Small Business Investors
There are many proven ways to find small business investors. However, finding an appropriate investment for your small business can takes time, effort, strategy, and proficiency. Once your business is ready, these ways can surely help you find investors to get you started:
- Credible Endorsements
Getting trusted endorsements from other entrepreneurs can serve as a fuel for your investment search. Investors favor introductions from other businesses who they respect and have worked with. Try to get in touch with your local community or social network and introduce your business idea with them. Someone might have a connection with the investor or groups of investors. Definitely, your financials portray about your business—but a warn introduction is more effective with the direct connection.
- Strategic Networking
Start networking with people around and in groups. Seep through your network groups for potential investors or look for networks you can easily become a part. The best start is to explore your alumni network for known investors, groups of angel investors, or acquaintances to others who can offer you guidance and support on how to find investors.
You can also connect with channels like industry trade organizations, local chambers of commerce, or a local Small Business Development Center (SBDC).
- Online Investment Platforms
Don’t limit your search to local. Go as broad as possible. Many online platforms provide accredited investors the opportunity to assist new businesses, making access to funding easier.
The best online investment platforms include Fidelity Investments, Ally Invest, Angel Investment Network, AngelList, and TD Ameritrade. Subject to the location you select to seek your connection, you might be working with an individual, or a syndicate, plus how the platform is structured. You can also leverage social media platforms to announce that you’re looking for small business investors.
- Industry Conferences and Summits
If you’re unable to network with others to don’t have one—then grow it. Many startups were able to secure funding through industry conferences and summits. The benefit of such events is that you can build your network with investors and can nurture your relationships with them. Additionally, try to learn about investors as to what type of businesses they’re interested in, at what stage, how much income they want to see, and any additional factors that make them excited. Leveraging such events means gaining exposure to experts & innovators, professional networking, the discovery of new trends and tools, knowledge sharing and most importantly, investment for your small business.
- Cold Outreach
You know even long shot like cold reach can be a difference-maker, as long as you know whom you’re reaching out to. The key is to stay professional in your pitch and personal especially for first-time entrepreneurs.
There is a possibility that you don’t know any investors directly, but that doesn’t necessarily mean you can’t find ways to make personal connections back to investors. Crafting the perfect email pitch and taking baby steps toward contacting investors can help you reach out, gather feedback, refine approach, then contact more investors successfully. The better your pitch as you go, the more chances you’ll have in scoring meetings.
You can also connect with investors via email, LinkedIn, and over the phone. Keep in mind that you’re not going to close every single investor you cold outreach. The key here is to do your research early to ensure you’re only reaching out to investors who are most likely to be interested in what you’re doing, and then focus on setting up that conversation.
- Friends and Family
You might be unwilling to ask for financial help from your friends or family, but having them invest their money into your business idea might help. Having someone you know better as a shareholder in your business can be comforting and a great option for you.
A close friend or family member will likely have your best interests and want you to succeed. While adding a new member into the business, ensure you sign an investor agreement and legally formalize the process, so there’s no dispute or confusion in the future.
- Educational institutions
Many educational institutions are developing incubators and accelerators for students and alumni, allowing startups to secure funding within the educational system. Interact with your local alumni to look for the type of business they have any programs for or want to invest the money. Although it’s a new practice, but reaching out to them and asking for support might help you and your business.
Prepare Beforehand While Finding Investors
Before you start connecting to find investors, make sure you have a perfect pitch. You should be prepared beforehand in order to raise money for your business. Here are few things you need to have in hand before you make a move:
- Do your homework
- Follow a strategic planning process
- Develop a business plan and financial model
- Draft a set of key milestones
- Know your passion, energize your story that epitomizes the problem your idea solves
- Create an investor presentation and pitch deck
- Draft an executive summary
- Craft and practice your elevator pitch
- Have a Q/A session with a hostile audience
- Understanding of your financials
- Unique business proposition
- A future vision of your company.
Investors want to see a trajectory for growth. The whole process isn’t instant and involves due diligence on the investor’s part and endurance on yours.
The Bottom Line
Remember, while evaluating the means for financing your business, not every business idea needs investment. Many startups are able to use their revenue to secure funding. If you have the financials, shrewdness, and a network, you might need not to find investors. Also, there are plenty of business financing options for startup businesses from business credit cards to small business loans to help you get started in the beginning.