Finding and securing potential investors for your startup can be crucial for the success of your company. Learning a few proven strategies can help you accomplish this goal. In this article, we discuss the benefits of securing investors for a startup, provide steps on how to find investors and offer tips for networking with potential investors.
Benefits of securing investors for a startup:
Here are the primary benefits of knowing how to find investors for a startup:
- Provides a solid base for your startup idea: Most startups originate from an initial idea, which then requires funding and personnel to turn into a functioning business. Securing investor funds helps you hire the required employees, invest in production equipment and have enough funds to sustain daily operations until the business generates enough income.
- Helps the company quickly gain market share: When a startup company comes up with a new idea for a product or service, one of its immediate goals is to capture as much of that respective market as possible. Quickly attracting new customers implies heavily investing in marketing and sales, which you can achieve with the help of an investor.
- Allows you to take more risks than a bank loan: While some startup businesses choose to finance their initial operations by taking up a loan, this typically limits the amount of money they can access, as banks tend to limit their risks. An investor is fully aware of the risks involved and may inject more cash into the business if they feel it has enough potential.
- Gives you access to funds that you don’t need to repay: If you finance your startup with the help of a business loan, you need to repay the loan plus additional interest, regardless of your startup’s success level. Although investors usually expect a share of the company’s future profits, you don’t need to repay them until the company becomes profitable.
- Raises your company’s standards and ambitions: Investors generally want to make as much of a profit from an investment as possible. They can help you and the rest of the startup’s staff set higher goals and keep you focused on your way to achieving them.
- Gives you access to their business network: People who invest in startups usually have a well-developed business network. Because the success of your company is in their best interest, they’re likely to help you by connecting you to various people and organizations that may help your startup.
How to find investors for a startup
Consider following these steps on your way to securing investors for your startup:
1. Ask family and friends
The first people many startup entrepreneurs consider when they need investors are often their own friends and family. It’s also usually more cost-effective, as people who are close to you are more likely to offer you the money in more advantageous conditions than a professional investor or a bank. You need to decide whether you want to ask them for a loan or an actual investment, which usually means you giving them a proportion of future profits.
Although convincing friends or family to finance your business may seem a straightforward and easy way to secure funds, it’s usually a good idea to treat them like regular investors and properly explain your plans and the risks associated with them. Having professional connections with personal acquaintances can have unwanted consequences unless you make sure you properly communicate with them every step of the way.
2. Look for equity financing sources
Equity financing means receiving funding from an outside party in exchange for a share of your company. Although giving up a part of the company to someone else may not seem attractive at the startup phase of an organization, it allows you to raise money quickly and use it to get your products on the market. There are many places you can find equity financing, such as investment firms, online crowd-funding sites, incubators, accelerator programs and online groups.
3. Apply for a small business administration loan
The Small Business Administration is a government agency that was created with the purpose of helping small businesses. Although they don’t directly offer loans, they can help connect you with approved lenders and may guarantee the loan for you, which means that the lending institution can give you much better repayment terms and interest rates. Besides helping you gain access to funding, Small Business Administration can also help you gain information on how to develop, launch and grow your startup business.
4. Find private investors
Private investors are people who look for business opportunities to invest in, usually in exchange for equity in the respective organizations. The two main types of private investors are:
- Venture capitalists: A venture capitalist is an investor who provides companies with capital in exchange for various privileges, such as an equity stake, a place on the company’s board of directors or a percentage of the company’s future profits. They can be individuals or venture capital firms and tend to choose startup companies with higher than average growth potential.
- Angel investors: An angel investor is usually a person with large amounts of disposable funds who seeks promising startup companies to invest in, usually in exchange for equity. As opposed to venture capitalists, who invest with the sole purpose of generating a significant profit from their investment, angel investors are usually more concerned with the organization’s long-term future.
Tips for networking with investors
Consider these tips when networking with potential investors:
- Have a thorough business plan. Unless they’re friends or family, investors usually analyze many startup companies before deciding to invest in one. You can improve your odds of making an investor choose your startup by having a thorough business plan that clearly outlines what your organization is aiming to achieve, how you plan to do it and what your timeframe is.
- Be prepared to refuse an inadequate offer. When networking with potential investors with the purpose of securing funding, you’re likely to receive deal offers that may require you to give up more equity or managerial control than you’re ready to offer. Although securing an investor is a major step in the life of a startup, you need to set clear boundaries regarding how much you’re willing to give up and refuse offers that don’t meet those criteria.
- Have a 30-second pitch ready. When meeting potential investors, they may not have the time to listen to your startup’s entire story. Prepare a short pitch, only half a minute long, which briefly explains what you do and what you’re hoping to achieve.
- Have your finances in order. Although startups rarely have very complex financial records, it’s important that they’re in perfect order and ready to present to a potential investor. Having all essential information available can be a sign of a safe investment and may improve your odds of finding the right investor.