As a small business owner, you don’t have to depend just on debt financing, such as bank loans, for your small business firm. When you start up your firm, you have to invest in your own firm and you may find family and friends who want to invest. You may want to find other investors for your small business, outside your immediate circle, to add capital to your firm. Angel investors are individuals who invest in small businesses and they can be interested in your particular business if you can get the word out to them. Angel investors typically make fairly small business investments, somewhere in the range of $25,000 to $100,000, but they can provide needed capital to small business firms.
Just like any investor group, they will probably want some to have some input into your business. That may be a good thing as they can provide valuable experience and advice to you.
Getting Investors For Your Small Business
To start a business you will need to choose or create a business idea. While this is an obvious step, many people who want their own business don’t have an idea, just the desire to be an entrepreneur. For the budding entrepreneur, there are many options; buying a franchise or an existing business, or looking to others for ideas for a start-up business. Once you have decided on the business you wish to start, the real work begins.
- Prepare a clear business plan because investors generally like to see that you have done your homework in terms of understanding the market. Create a section that specifically and in detail describes your product, service or invention. Create a section that talks about your background, experience and that of the other people in your start-up company. Discuss your target market, the people to whom your business is aimed. Make a section each for talking about the competition you face in the market, a detailed marketing plan and how much financing and capital you need.
- Network with people who know you. Talk to friends and family members to ask if they know of any small business investors. Ask your attorney, accountant, banker or lender if she knows of small business investors who might be interested in your start-up idea or if she knows of any angel investment groups.
- Check out funding Web sites where small business angel investors can find you. These sites are a relatively new phenomenon and their structure varies. However, the best ones allow businesses to post funding requests and allow investors for small businesses to contact those requests that match their investment goals
- Join your local chamber of commerce as chambers of commerce connect small businesses with each other and host local meetings on a regular basis. Ask your chamber of commerce for the names of small business angel investor groups or venture capitalists. Or network with other small business owners at chamber meetings and ask others if they have ever received funding from an investment group or an angel investor for small business.
- Find a nearby college or university; check with the university to see whether it runs an entrepreneurship program or a similar degree for students. These programs can sometimes attract small business angel investors or venture capitalists looking for new opportunities generated by the university and students. Contact the director or chair of the entrepreneurship program and make an appointment with him. When meeting with the director, talk to him about your start-up business and ask for connections to possible small business investors.
Types of Small Business Investors
An increasing number of small businesses today are looking to outside investors, obtaining finance in return for giving away a share of their business.
There are two common types of small business investors:
- Business angels
- Venture capitalists
Business Angels
They are wealthy individuals who put their own money into businesses with a high growth potential, in return for a share of the business. Sometimes business angels act as part of a group or investment club. They tend to make their skills and contacts available to the business to help ensure they get a good return on their investment. They usually invest from £10,000 to £750,000 depending on the wealth of the individual or group.
Pros and Cons:
Business angels are more inclined to take on high risk ventures; providing they see potential for profit. The small business angel investors have valuable experience that they can bring to your business. As the money is their own, most business angels will put effort into helping you succeed to ensure they get a good return. As they invest their own money, most small business angel investors only take on investments irregularly. This may mean that finding the right business investor could be a lengthy process. To ensure their investment is secure, small business angel investors may ask for a large percentage of your business, particularly where the risk involved is high.
Venture Capitalists:
They invest large amounts of money into businesses in exchange for shares; they will rarely invest figures below £1million. Businesses need to have a proven track record, reliable management, a sensible but ambitious business plan for the small business which offers the investor a good potential return within a few years (normally 3-5) and a product or service with some sort of competitive advantage.
Pros and Cons:
Venture capitalists can invest much larger sums than most small business angel investors.
If you successfully attract venture capital funding it will make your small business much more attractive to other investors, as well as banks and other lenders.
Dealing with a venture capitalist is a much more complicated process than other forms of lending and significantly more so than small business angel investors.
Venture capitalists are rarely as hands on as small business angel investors, even though they will also have significant experience. They mostly look for your ability to run the company rather than their ability to make it work; though they will almost certainly provide advice and contacts.
Even if you’re not interested in obtaining a loan, look into government programs for small businesses, such as the Small Business Administration, which in addition to its loan guaranty program for small businesses offers a variety of grants.