Develop Or Refine Your Business Plan
Im not saying you shouldnt have a business plan. You should.
Your business plan is an essential piece of the funding puzzle, explaining exactly how much money you need, and where its going to go, and how long it will take you to earn it back.
Investors will look first to a summary, and then a pitch but if you get through that screening, theyll want to see a business plan for the process of due diligence. And even before that, during the early stages, theyll expect you to have a business plan in the background, for your own use.
Most commercial banks require a business plan as part of a loan application. A plan is also required for applying for a business loan guaranteed by the Small Business Administration .
Everyone you talk to is going to expect you to have a business plan available. They may not start their discussions with you by looking at the plan, but dont get caught without one when they ask to see it.
Where To Find Investors For Small Businesses
The good news is that thereâs no one direct approach to find small business investors. The bad news is that thereâs no one direct approach to find investors for small business investors. You know what we mean?
That said, you do have several avenues to meet investors. Itâs a process that takes time, effort, strategy, and professionalism. But if your business is ready, one of these approaches on how to find investors just might work for you:
Which Industries Attract Angel Investors
Venture capital is about making big returns, and angel investors correspondingly tend to prefer a few particular industries including:
- Software. Investor-friendly startups have a plan for immense growth and a scalable business model. The software industry is good for this and tends to attract many investors. Software as a solution development companies and other proprietary software developers are widely considered by angel investors. Software is, by a large margin, currently the most invested-in industry.
- Technology. This is another very big area for investors, particularly in biotechnology, information technology, financial technology and networking systems. These take many critical roles and are also heavily invested in.
- Mass market consumer goods. Companies with a viable product that has the potential to become a household item often benefit from venture capital investments.
- Equipment and specialist products. These products often have distinct requirements, and it can be clear when one is simply better than its predecessor. This can make these products a relatively safe option for angel investors who want a return on their capital.
If you are in one of these industries then your odds of attracting investment might be better, but that doesnt mean its easy. Correspondingly, being in other industries might make getting investment more difficult, but that doesnt mean its impossible.
What makes angel investors different?
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Angel Investors Need To Understand Your Product Or Service
We all want to know where our money is going. Angel investors want to understand exactly what they are financing, especially for startups in the tech field. Since angel investors are investing their own money, building their trust and establishing a relationship with them are key to gaining their support. More than 50% of respondents claimed this as one of their top reasons for investing, and 94% find it helpful to have subject-matter experts explain the technologies within their company before investing. In fact, many choose not to invest in specific businesses due to their inability to grasp their technology.
The easier we make it for angel investors to discover, evaluate, and participate in science and technology startups, the more well see money going into these worthy companies, and the benefits to humanity accrue, Chaturvedi said.
Other Small Business Owners
You can also reach out to other small businesses on your street to invest in your business. Often, small business owners want to see others like them succeed, because a thriving Main Street means success for all small businesses.
Squash the Beef Vegan Catering, a Cleveland-based vegan soul food catering business, ran a Honeycomb campaign in 2020 to purchase a food trailer. In 2021, they invested in Carters BBQ, another Black-owned business in Cleveland that was also raising funds on Honeycomb to purchase a food trailer. Even though their businesses differ on meat-based options, Squash the Beef saw the value in investing in another business in their community, leading to value for both them and Carters BBQ!
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Making A Loan To Your Business
If you want to loan money to your business, you should have your attorney draw up paperwork to define the terms of the loan, including repayment and consequences for non-repayment of the loan.
For tax purposes, a loan from you to your business must be an “arms-length” transaction.
An arms-length transaction is a transaction between two parties who are:
- Independent in both a business and personal sense
- Don’t have a close relationship with each other, like a family relationship
This kind of transaction assumes that both have equal bargaining power and aren’t subject to pressure from each other. There’s also an assumption that neither has a fiduciary duty to the other that would create an inequality.
It should be clear that the loan is a binding obligation on the part of the company. Without a contract, the IRS can deny the validity of the loan.
When you receive payments from the business, they are split between principal and interest.
- The interest on the debt is deductible to the business as an expense. It’s taxable to you personally as income.
- The principal is not deductible to the business no matter how the money is used. There’s no restriction on how the business can use this income unless that’s specifically stated in the loan agreement. The return of principal to you isn’t taxable because you already paid the tax on it, in the year you had the income.
How Do You Invest Money In A Small Business
To find small businesses, you need to look for opportunities in your personal network. You can also network with other investors, check trade publications for news about new startups, and call the local chamber of commerce. Once you find some opportunities, take the time to interview the entrepreneurs and decide which might be a smart investment for you.
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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.
How To Invest In Startups
Not all investors want to take the risk that comes with investing in startups. However, that doesnt make startups a losing option for everyone.
U.S. News & World Report says that, when backing a startup, you probably wont see a return on your investment for at least ten years. Make sure that if you decide to invest in a startup, you have time to wait and a higher risk allowance.
Andaccording to data from Small Business Trends, about 44% of small businesses fail by their fourth year. That lowers the likelihood of a successful investment on your part and can mean significant losses.
Before you invest in a startup, research the company and its business plan. Talk to the owners just as you would with an established private company, and ask questions about their operating model and whether they have other investors.
You can typically invest in startups in a few ways:
- Crowdfunding online.
- Pre-IPO opportunities.
- Buying equity with a local company.
Each of these methods can build your investment over time, but their success often depends on how well the company you select performs.
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The Problem Of The Preferred Equity
Sometimes, small business investments straddle the ground between equity investments and debt investments, modeling preferred stock. Far from offering the best of both worlds, preferred stocks seem to combine the worst features of both equity and debtnamely, the limited upside potential of debt, with the lower capitalization rank of equity.
In the end, the investment type you should choose comes down to your level of comfort with the risks of debt or equity, and your investing philosophies.
Indulge In Some Soul Food
Volunteering time to help another human being contributes to the greater good. That’s why community involvement is such a powerful way for employees to feel connected to something bigger than themselves. People who take part in corporate social responsibility activities tend to be more engaged in their work, hold more positive views about their coworkers and have higher levels of job fulfillment. A company’s commitment to community and social responsibility creates an environment that makes a difference in the lives of its employees, helps build loyalty to the business and can impact the organization’s ability to attract and retain top professionals.
Recently, Salesforce released a new philanthropy cloud that connects corporations, employees, and nonprofits at scale. Employees can track and take ownership of their philanthropic impact and team up with coworkers to fundraise and volunteer.
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How Much Can You Invest In Startups
Non-accredited investors should be aware there may be a maximum amount you can invest in crowdfunding ventures during any 12-month period, according to SEC guidelines:
- If your annual income or your net worth is less than $107,000, you can invest up to the greater of $2,200 or 5% of the lesser of your annual income or net worth.
- If your annual income and your net worth are equal to or more than $107,000, you can invest up to 10% of annual income or net worth, whichever is less. This amount, however, cannot exceed $107,000.
Just because you can invest a certain amount in startups doesnt mean you should go all-in. The right amount to allocate should be no more than the investor can comfortably lose if the startup goes bankrupt or takes an especially long time to pan out, says Randy Bruns, a certified financial planner in Naperville, Ill.
Experts generally also recommend making several small investments in a few different startups versus one big investment in one startup. In fact, AngelList even writes in its investing guidelines that you should only invest if you have enough capital to make 15-20 startup investments.
This provides diversification: If you invest in five startups, and four of them fail, you still have one winner, which may help protect some of your money. That said, you should expect your total losses to exceed your gains, notes AngelList.
Preparing For Your Meeting With An Angel Investor
Angels typically invest in companies that not only have great ideas, but a great team, and a track record for executing those ideas. For that reason, get to know your industry and your competitioneven more than the investor.
Be fully prepared before you reach out and have all your information ready for the investor.
Show the potential angel investor a prototype or demo of your product and talk about the customers, even if they are currently non-paying, who will be using it.
Investors need to see your financial statements, including any outstanding debt, revenue projections, and the ownership and legal structure of the company.
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What Are Your Key Metrics
Its safe to say you want to see something happen when you spend this money. What part of your business do you think will grow as a result of spending this money, and what numbers can you track to make sure its really happening? Maybe its setting up a , maybe its keeping tabs on how your promotional and transactional emails are performing, but whatever it is, make sure you know your key performance indicators are ahead of time, and benchmark against where they began before you started spending money.
How To Woo An Angel Investor
Before you go about attracting investors, make sure youre ready to put your best foot forward. Just like going on a first date, making a bad impression means you probably wont get a second chance. Before you even start soliciting investors, make sure youve done the following:
- Establish profitability, both actual and potential
You’ll need to convince angels that you can turn their money into even more money. To do so, you must make it clear that the product or service your company offers is able to make it happen. It must not only be profitable, but also in demand.
- Know the cost and profit of each product or service offered.
- Have a realistic growth plan for attracting and keeping a customer base.
- Ideally, your product or service will fill a unique and real need, or it will be objectively better than the nearest competitor. This will help you demonstrate its viability and profitability.
- Know your market
Can your brand go worldwide, or will it always be focused in America? Will your customers keep buying more, or will they only ever buy once? An investor will want to know about this before deciding whether or not to get involved.
- Have the numbers
The facts and figures are the evidence you need to convince investors to jump aboard. Angel investors are keen on seeing determination and passion, but only if it comes with the right numbers.
- Know what kind of deal you want
Case study: From the tank to the bank
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How Is Your Cash Flow
Spending money you dont have isnt always off-limits, which is why things like small business loans and investors exist. But in any case, you should always know how much cash you have available, how and when youre planning to spend it, and where you might run into issues. Even if you have a small business idea with a frugal mindset, it doesn’t mean your business always has to run on minimal investment. If you are looking for investment or funding to grow your business, check this guide on how to get a business loan.
Whether youre using a business loan calculator, planning out how youll spend a loan, or how youll spend your monthly operating expenses budget, getting a handle on your cash flow is something you need to do before you make any big investment decisions. That way, you wont end up without enough money to cover your next inventory order because you took a big swing and overspent on a Facebook ad campaign.
Can An Individual Invest In An Llc
Businesses need capital to fuel growth. That capital can come from debt or equity. Most small businesses pursue loans from traditional financing sources such as banks, credit unions, home equity line providers. Small business owners also could use equity from investors. If you structured your business as a limited liability company, you can bring in investors individuals, corporations and partnerships to raise capital for your business.
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Some Considerations Before You Buy
The first thing a business needs to consider when investing is their why, Ken Alozie, managing director at Greenwood Capital Advisors, told The Balance via email. He said that the business owner should ask themselves how this investment helps meet business objectives. They should also think about the businesss liquidity needs, time horizon, and risk tolerance of market volatility. The answers to these questions can help business owners to choose the best investment for their situation.
Make sure that youre familiar with both your personal and business financial standing before committing to new investments.
Small business owners are already stretched thin, and some investments can not only be risky, but also distracting and time consuming. There is no point in investing in something you are not familiar with, Certified SCORE mentor Diana Martinez explained via email to The Balance. She said that if business owners dont have the knowledge, then they should be sure that they can spend the time understanding and taking charge of their own investment portfolionot just relying solely on a financial advisor.
How To Connect With Private Investors
Private investors are key for new businesses looking to raise start-up capital. Not only do private investments bring financial help to the entrepreneur, by finding new fundraising options but often these investors can provide expertise and contacts that the new business may need in order to get to the next level.
The amount of investment from private investors varies greatly, as investors based in the US and overseas range from a variety of budgets and a variety of industry sectors. Many investors will look at their own portfolio companies interests, whether the idea is competitive / innovative in their minds, and sometimes where the new business is located.
Many private investors congregate around the major cities in the United States such as San Francisco, New York, Chicago and Seattle. However, with connections easier to maintain over long distances, online partnerships have been increasing so where your business is based may not be such an important factor any more. This can be beneficial since real estate costs and rent can be high in some of these premium locations.
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