Steps for Finding Private Investors for Your New Business
Successfully applying for a small business loan is one way to get capital for launching and operating your new business. But you can also raise capital through outside investors. Understanding how to identify potential investors and convincing them to back your business can seem challenging. Here are four steps to expect on your way to the right investor.
1. Understand the types of private investing. It helps to begin by learning a few terms. “Private equity” is used to describe a number of investment types, whether by private individuals or privately owned institutions, such as private equity firms. Private equity might be used for financing a project, business startups, purchasing a business, or similar investments.
Venture capitalists are private investors who are looking for high-growth from a new startup. These are often professional investors who focus on opportunities that yield potentially high returns. They often concentrate on an industry, region or stage of development. Venture capitalists sometimes serve in advisory roles as part of their arrangements with the business owner.
Angel investors, on the other hand, are generally individuals of high net worth, often former entrepreneurs, who are looking for opportunities for private investment in startup companies. They are often a source of wisdom as well as capital. Their investments usually come in smaller amounts than what is typical of venture capitalists.
2. Identify Potential Investors. Professional networking is the best way to identify potential private investors for your business. Whether your city’s chamber of commerce or another business organization, start your search there. Talk to other small business owners as well as potential investors. Asking for advice from a seasoned expert can lead to future investment opportunities.
In addition, there are national, and often local, investor and venture capital groups. Your state economic development agency or small business association may also be able to put you in touch with local investors.
3. State your case. This is the point where you need to effectively sell your business and its potential, keeping in mind the investor’s criteria and self-interest.
Research your potential investors. Understand their investment history and what they hope to get out of the investment. Understand what is motivating investors and build your sales pitch accordingly. Be prepared to answer questions about every aspect of your business, including plans for long-term growth.
Your business plan will play a crucial role in the success of your pitch. Ensure your assumptions are realistic and valid. Investors will be most interested in how you plan to generate a profit and how that equates to a healthy return for them. Know your business plan completely so you can quickly and effectively respond to questions rather than having to thumb through your plan to formulate an answer.
4. Await next steps. Once you have made your pitch and provided your complete business plan, your only job is to wait and answer any additional questions. If further interested, expect a venture fund to perform due diligence as a next step, which may lead to drawing up terms and conditions for funding the investment.
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