A Strong Management Team
A good idea is really only a small part of the equation for a successful business. In fact, lots of people have good business ideas its the people that can execute well that generally succeed. Investors will pay a lot of attention to the section of your plan where you talk about your management team because they want to know that you can transform your idea into a successful business. If you have gaps and still need to hire key employees, thats OK. Communicating that you understand what your needs are is the most important thing.
Industry Conferences And Summits
If you donât have the network you wantâor needâthen grow it. Samantha Urban, CEO of San Diego-based service company Urban Translations, recommends events, which she says draw in hundreds of investors and CEOs. Sheâs secured funding through summits herself after just two meetings. Urban adds this advice on how to find investors:
âThe key build and nurture these investor relationships. Find out what type of companies they invest in , what stage, how much revenue they want to see, how long they take to do due diligence, and any other factors that make them get excited over a potential deal.â
She also stresses that youâre building a relationship, slow and steady. âNever assume that you will be invested in right away,â Urban says.
Motivation Of Angel Investors
The motivation behind investing can differ with each angel investor. Most invest for one of three reasons:
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Keys To Getting The Money
If youve never started a business before, and if youre approaching people whove 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.
Know How To Find Investors That Work For You
No two businesses are the same, and neither are any two types of investors. Carefully research each type of investor, noting who’s looking for what, and what they’re offering in return for their funding.
If you want to retain total control of your company, consider an angel investor and avoid equity financing or venture capitalist looking for partial ownership. Remember that some investors, like incubators and accelerators, only work with businesses at early stages.
No matter what type of investor you seek, a business plan and accurate financial records are crucial to help take your company into the next phase.
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How To Attract Investors When Creating Your Business
So, youve got a brilliant business idea, and now you need money to get it off the ground. This is where business investors come in handy. Investors are an invaluable resource for entrepreneurs, providing essential financial support for their projects. However, convincing them to come on board with an endeavor can be a considerable challenge.Here, youll find 12 helpful tips for attracting and engaging the investment your new business needs.
Justify Use Of Proceeds
Investors want to know precisely how your company plans to use its proceeds. Will you allocate their money to capital expenses? Research and development? Legal and accounting fees? What about recruiting costs and salaries?
Establishing capital efficiency early in the process can help your company develop insightful leadership and ultimately make you more attractive to investors. Be prepared to explain to investors what milestones youre aiming to achieve and the anticipated results.
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How To Invest In A Business And Make Money: Debt Vs Equity
Regardless of whether a business is an early-stage startup or major multinational corporation, the same basic rules apply.
Investing in a business is done by taking a debt or equity position in a company. While it is true that both can deliver promising returns, there are crucial differences worth noting.
Knowing how to invest in businesses begins with understanding the key differences betweendebt and equity financing. Two ways you can invest in a small business are by lending capital to the business or buying company shares.
Debt financing: If you provide capital to a business in the form of a loan, it will be repaid in installments over an agreed-upon term, plus interest. This is known as a debt investment or debt financing.
Equity financing: In contrast, if you purchase shares, this ownership will entitle you to a portion of the businesss earnings over time, known as equity financing. Technically speaking, owners of a companys stock own a portion of the company and, consequently, are entitled to an equivalent share of the revenues and dividends generated by the business. Additionally, if the company expands, your shares will gain worth over time.
What Is A Fair Percentage For An Investor
The amount of a companys ownership given to an investor is often directly related to how much money that investor is willing to put into it. However, there are so many different variables in every business, there is no correct answer when determining a percentage.
Keep in mind though, that with investors, the capital outlay will not be worth it to them, if the percentage is too low. For instance, offering an investor 5% is likely to be meaningless, because he can expect little return even if the company is successful. It will also take him a long time just to recoup his original investment, let alone start to make any profit.
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How To Find The Right Investor For Your Business
As a business owner, securing funding is often key to the successful running of your company. Whether you’re starting out, expanding, or need to temporarily cover cash flow, getting investment can bridge the gap between having an idea and making it a reality.
But how do you secure the right type of investor for your business when you donât know where to start?
In our guide, we explain everything you need to know about finding the perfect investor, including what they are, where to find an investor and how to attract the right one for your small business.
If youâre wondering what makes a small business, you can read our simple guide to see where your firm fits in.
Angel Funding Vs Seed Funding
When youre figuring out how to find investors, you might be asked if youâre just looking for a single small business investor, or if youâre raising a full seed round. This is a question youâll want to know the answer to.
To kickstart their growth with investors, some new businesses will take funding from just a single angel investor or two, but forego raising an entire seed round . That gives you a deep relationship with your investors, and also allows you to retain a substantial portion of equity. Angel investors also rarelyâif everâtake board seats.
That said, many companies will raise seed rounds of varying sizes in which angel investors will participate. Make certain you know where you fall, and whether or not youâre hoping to potentially engage with seed funds alongside angel investors.
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Be Ready To Explain Your Cap Table
A capitalization table lays out all the equity and debt ownership and liquidation rankings of the various investors or lenders invested in a business. For investors, a cap table is valuable because it reveals precisely how much the companys founders may own.Investors want to ensure their interests are aligned with the founders, and there is enough equity left over to bring in investors at later rounds. Be forewarned that founder dilution can raise a red flagwhere cash provided to founders can come on onerous terms.
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.
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Understanding The Angel Investor
Angel investors look for entrepreneurs who are passionate about what they are doing, knowledgeable about the product they are developing, and hungry for better customer solutions.
With me, it was always the connection with the entrepreneur. It was about whether this was someone I could see myself spending time with and having fun with, and supporting the new product, asserts Bélanger, also a former angel investor.
With me it was always the connection with the entrepreneur. It was about whether this was someone I could see myself spending time with and having fun with, and supporting the new product.
Managing Director, Growth Venture Co-Investment Fund
Develop A Strong Business Plan
Your business plan is an all-important document that proves one thing to investors: that your business is worth their risk. Your plan should clearly outline your business objectives and goals and demonstrate your teams expertise in your field.
Show that you have a deep understanding of your customers and provide a complete description of the product or services you offer.
Read: Business Startup Checklist: A Cheatsheet for New EntrepreneursAn essential section of the business plan is your marketing plan. It defines your market size and growth prospects and should show trend influences and sales potential. Here is where pricing, promotion, and distribution strategies come into play. Talk about barriers to entry as well, addressing how you plan to keep competitors at bay.
Finally, make things digestible for everyone by presenting your business plan in an engaging format. Not only does this make you stand out, but your audience may also actually thank you for it.Its worth noting that investors already familiar with your industry and market may be more likely to invest in your company because of their expertise and comfort. Note their knowledge may also mean more targeted questions for you, so be prepared to showcase your experience.
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Venture Capital Is A Growing Opportunity For Funding Businesses
Actually, venture capital financing is very rare. Ill explain this more later, but assume that only a very few high-growth companies with high-power management teams are venture opportunities. Many people use the phrase venture capital when they really mean outside investors or angel investors.
Debt Investments In Small Businesses
When you make a debt investment in a small business, you loan it money in exchange for the promise of interest income and eventual repayment of the principal.
Debt capital is most often provided either in the form of direct loans with regular amortization or the purchase of bonds issued by the business, which provide semi-annual interest payments mailed to the bondholder.
The biggest advantage of debt is that it has a privileged place in the capitalization structure. That means if the company goes bust, the debt has priority over the stockholders . Generally speaking, the highest level of debt is a first mortgage secured bond that has a lien on a specific piece of valuable property or an asset, such as a plant or factory.
A first mortgage secured bond requires property, such as real estate, as collateral.
For example, if you loan money to an ice cream shop and are given a lien on the real estate and building, you can foreclose upon it in the event the company implodes. It may take time, effort, and money, but you should be able to recover whatever net proceeds you can get from the sale of the underlying property that you confiscate.
The lowest level of debt is known as a debenture, which is a debt not secured by any specific asset but, rather, by the company’s good name and credit. This is generally a bond, issued as a loan without collateral with fixed payments and interest.
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Keep Your Finances Tidy
Having your business finances in order can be a great way to show potential investors that you know how to run your business. Keeping your finances in order and readily available allows investors to see a clearer picture of your company, after all, they are risking their money by investing in your business.
Your potential investor is going to want to see your business’s financial statements, sales, margins and cash flow.
Positioning Your Small Business Investment Strategy For Growth
Sometimes it isnt enough to start your ownsmall business and build it from scratch. Between time constraints, capital limitations and opportunity costs, theres a lot that can get in the way of successfully building a small business to generate high, long-term profits.
This is why its so important to channel your entrepreneurial vision into a sound investment strategy. When you buy into a small business, in the form of a debt or equity investment, you can share the rewards of a companys success without having to invest the serious time and energy commitment of managing it.
Granted, small business investments can be risky, and no one business can guarantee consistently high revenue or capital gains. But the market does tend to reward those who invest in a diverse portfolio of small, growth-oriented companies.
If you think investing in a small business sounds enticing, the first thing to do is to assess the situation. Youll need to consider how much you can afford to invest and how much risk you can tolerate so you can make the best choice for your own finances.
Now that you know how to invest money in a small business as well as the questions to ask before investing in a business, you can be on your way to backing a venture thats aligned with your wealth-building goals.
Grow your business with the perfect loan
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Investors Vs Business Loans
A business loan differs from that of an investor in the sense that you wonât be required to give up equity within your company. Youâll also have to consider the risk versus the return â if you use a Â£400,000 loan and turn it into Â£1m in profit, that profit is all yours, but if you make a loss and your business goes bust, the loan must still be repaid.
When it comes to choosing between an investor or a business loan, there are certain pros and cons that youâll have to consider.
Land On The Right Figure
Here’s a not-so-shocking statement: investors want to know where their money is going. If you ask for too much capital or too little to make any difference this could be seen as a red flag.
If you’re stumped on the right figure to ask, you may need input from a third party, such as a financial advisor or consultant. Or, if you’re a scrappy new startup, you may want to consider establishing an advisory board.
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What Are The Pros And Cons Of Working With Angel Investors
Among the reasons you may want to seek funding from angel investors include:
- Angel investors may take larger risks. Unlike traditional debt financers, angel investors arent beholden to banks or other institutions. This allows them to invest their money much more freely. As such, angel investors may be more likely to take investment risks virtually unheard of among banks and traditional debt financing providers.
- Your company can take less risk. Often, angel investors dont require repayment if your company fails. This arrangement is far less risky than funding your company through business loans or other debt financing routes that require repayment no matter how your company fares.
- Angel investors are knowledgeable. Most angel investors didnt just magically acquire their massive amounts of money they had to learn a ton along the way to grow their wealth. When an angel investor funds your company, you get access to the knowledge your investor has accrued and can use it to grow your own company. This background can prove especially helpful if your company is a startup: Although 9 in 10 startups fail, angel investor knowledge can make your company the one success story.