Ideas for business don't cost money, but bringing those ideas to life does. That is why many aspiring entrepreneurs find themselves in a familiar situation – possessing a genuine start-up plan but lacking the required funds to get it off the ground. Then again, it's possible to bring your idea to life by raising funds from investors. It's something you're probably aware of, but many aspiring entrepreneurs don't know how to go about it, starting with where and how to find those investors. How do you go about finding an investor for your start-up?
Finding start-up investors is not a simple task, and it does require a lot of time and effort, but most importantly, it requires a process, i.e., knowing what to do, where to approach investors, and how to pitch your ideas to them.
This guide will give you some tips on how to find investors for your start-up.
Why Do You Need Investors?
The answer to this question seems obvious – start-up investors can help you start a business when you don't have the funds. But:
Investors bring a lot more to the table than just capital. Here are some reasons you should consider bringing in external investors even if you can fund the early stages of your company:
- Start-ups are risky by definition, and investing all your savings into one might put you in a bad position if your company goes south. Bringing in investments from external investors shares the risk between you and them, exactly how business is being done for over 500 years now.
- Investors usually bring a lot of industry experience, and when they invest in your start-up, your interests are aligned. You can gain guidance and assistance in your strategy and planning.
- Investors are also extremely well-connected people so that they can open up a vast network of valuable connections for your business.
- Experienced start-up investors experienced losses in past start-up investment. This is the nature of the beast. If you are ready to listen, they may also share what caused failures and how to avoid repeating the same mistakes and pitfalls.
Types of Business Investors
While we've been using the term 'investors' quite generally so far, it is actually quite diverse. There are many different types of investors out there, and they have their own methods and motives to invest. To decide the kind of investment you want to go for, you first need to know about these different investor types:
Friends and Family
The first place to look for an investor is within your circle of relationships and acquaintances. The benefit of seeking funding from friends or family is that there are less formality and more familiarity. Friends and family tend to be less experienced in start-up investments and often referred to as FFF - Friends, Family, and Fools. They lack the experience and capacity to evaluate the risk of start-up investment, which is sometimes needed as the involved risk is so high.
The downside is that there will be some level of hesitation when taking money from people you know. There's a chance of risking a personal relationship if you cannot return the money if your start-up fails.
Please think carefully before you take their money. Disclose that the investment comes with a high potential return and a very high risk of losing the investment altogether.
Business/Start-up Loans from Banks
Can bank loans provide you with money needed for a start-up? Yes. But is it a good idea to seriously consider taking bank loans for a start-up? Not so much, and for more than just one reason.
Though bank loans provide you with the capital for your start-up, they also come with deadlines and payment schedules in the form of regular installments. These installments become a monthly expense for your business.
Considering the risky, unpredictable nature of start-ups, you're not even sure how much revenue your start-up will make right off the bat or even make any revenue at all in the initial months.
Burdening your business with an expense of monthly installments before you even start making guaranteed income is a terrible idea. Now consider that you will be paying back more than you took because of interests, and that should be enough to tell you that bank loans are not an ideal investment for start-ups.
Crowdfunding is a process of raising funds for your business from a large group of people so that even small amounts invested by each person adds up to a considerable amount in total. The benefit of crowdfunding is that it can generate a substantial investment for start-ups while only requiring small contributions from each investor.
That said, crowdfunding is a good option only for the specific type of business start-ups – those that are based on making and selling a physical product with a B2C business model. Even for such a start-up, crowdfunding is likely to work only when a prototype product is available to show and prove some level of viability. Without a prototype product, or worse, for service-oriented companies, there's not much hope of convincing thousands of people to put their money on just an idea with nothing to present in front of the masses immediately.
Of course, there is still a decent chance to raise money from crowdfunding successfully, but that too requires grueling effort and extensively marketing your business plan, which in itself can cost you money, to begin with.
Angel investors are willing to invest in start-ups and risky ventures, most often in return for equity or a business share. They are usually financially affluent people who have sufficient funds to invest in start-ups as another asset class diversification
The benefit of angel investment is that the investors are usually experienced and well-connected people who can help your business grow. The disadvantage is that they take away a share of your business just like any other investment.
If your company gains enormous success, those shares may be worth a lot more than the investment you received in the long run. Giving up shares also means some loss of control, even if not immediately apparent.
Start-up Accelerators and Incubators
Accelerators and incubators are organizations and teams that invest in start-ups in exchange for equity. However, they don't just invest the money but usually, work very closely with the start-ups and personally guide them through the company's early stages to raise VC money. The primary benefit of accelerators and incubators is help and assistance, much like having a personal mentor for your business, sometimes along with some funds.
The disadvantage here is that, as with angel investors, they take some share of the company, so you don't have total control. Another downside is that relying on accelerators to take off your start-up in the early stages may cause you to become dependent on them, so you have a more challenging time maintaining your business once you detach from them.
A venture capitalist can be an individual or an organization that offers to invest in potential start-ups. The money they invest doesn't come from their own pocket but a collected pool of funds from other investment companies and individuals. In simple words, they collect funds from parties willing to invest in businesses and then assign those funds to companies that need investments.
The benefit of venture capital investment is that it doesn't need to be paid back in cash, and venture capitalists contribute their expertise and experience to the start-up, very much like angel investors. The disadvantage is that venture capitalists prefer investing in businesses that are already established. So, it's less likely to get venture capital for a start-up that hasn't taken off the ground yet.
How to Find the Right Investor for Your Start-up?
Now that you are well-acquainted with the types of investors and the benefits and drawbacks of each kind of investment, we'll guide you through the process of finding an investor and doing your best to convince them to invest in your start-up. It's easier to follow this process when we divide it into four stages as below:
Stage 1: Before Meeting an Investor
If you have decided to approach an investor for your start-up, you need to plan a few things, such as:
- Prepare your business plan. Make it as detailed as possible, accounting for every aspect of the business and how you plan to operate from day one.
- Have a growth plan on paper. Investors are interested in start-ups that are likely to grow big and provide them substantial returns. It would help if you had a plan on how you will be generating revenue and increasing it consistently so that your business can grow.
- Prepare your pitch. Even with a business plan and a profit model ready on paper, you need a unique selling point to prove why your start-up is worth investing in.
- Try to get in touch with other start-ups who were successful in raising funds through investors. You can learn a lot from them and the process they had to go through.
Stage 2: Searching for Investors
After you have a concrete layout of your business plan, it's time to start looking for investors. A bit of online research will show you many platforms where you can find potential investors, but we have also listed a few of them:
- Online platforms such as AngelList, SeedInvest, StartEngine, CircleUp, and WeFunder.
- Start-up and investment-related events such as Web Summit, TechCrunch Disrupt, and Collision Tech Conference. Besides finding investors, you also gain beneficial insights for start-ups in these events. Social media is a super-handy platform to find out about more such events.
- Enrolling in an accelerator program. Finding accelerators around you isn't hard, but you need to be careful about which one you go for and how capable they are to help you start and grow your business.
- Governments also support capable citizens in launching start-ups, so look into different government programs and schemes for start-up investments in your country or state.
An important thing to consider when searching for investors is that it's best to approach an investor from the same industry or niche as your start-up. That way, you can better communicate with them regarding your business plans, and they will also be better equipped to analyze your business plan and provide their valuable feedback.
Stage 3: Approaching Investors
With your proposal and pitch ready and finding one or more investors to reach out to, you finally need to gear up approaching them. Keeping in mind that investors often come across many proposals and have a busy life, you can't expect to get a lot of their time right away.
First of all, you need to have a shorter version of your pitch in hand, such as the elevator pitch. The goal is to capture the investor's attention in minutes – not to convey every detail of your idea and business. If you can get them interested in five minutes or less, they will be willing to hear more from you and schedule a formal meeting.
Apart from your plan and pitch, there are three things you need to account for when you're approaching investors for the first time:
- The best and shrewdest investors value their time highly, are quick and efficient with their decision making and have an excellent sense of judgment with sharp business instincts. So they can and most likely will judge you and your business plan in the first meeting itself.
- Investors don't just invest in ideas; they invest in people. The way you carry and present yourself, as well as your attitude and personality, are all equally as important as the business plan in your bag and the elevator pitch in your mind.
Hence, the saying' first impression is the last impression' will be true in every sense when you meet an investor. You want them to like you, and not just your business plan. Sound logic, good communication of skills, confident attitude, realistic and logical way of thinking, and even some witty corporate humor are essential personality traits that can leave a great first impression and bag you a second meeting
Stage 4: Convincing the Investors
You start with plotting down your business and growth plan on paper. You make use of multiple channels, platforms, and sources to find investors. You've met a few investors, and one or more of them have agreed to hear more of your plan on a second meeting. Now comes the hard part – convincing an investor to give the green signal and fund your start-up.
Most entrepreneurs make a mistake at this stage because they rely solely on their business plan and pitch, and their entire focus is on showing their idea in a positive light. They end up trying too hard to sell their idea, and it makes them get lost in the crows of people and ideas. If you want to be different and unique, you don't have to sell your plan as extremely innovative. Instead, it would be best to show how well prepared you are to turn the idea into a successful business.
For example, it's great to have a mathematical profit model for your business based on charts and statistics derived from the latest market data that can give an estimate of how much profit you expect to make and by when. If your plan involves second or third rounds of fundraising, talk about how you plan to do that as well. The idea is to present yourself as a far-sighted owner with a realistic vision for the business and show the investors that you have already put thoughts into how you plan to use their money today to make more money for your business and them tomorrow.
But lastly, remember that there's no hidden technique to convince investors, and you should be ready to face rejection from a few parties. Also, be prepared to put in the effort to reach out to multiple investors. What's important is that you should be well-informed about the industry you plan to enter and have a rational and realistic business proposal.
Simply finding investors isn't that hard, but getting them to listen to you and willing to invest in your start-up is a long, arduous, and unpredictable process. Of course, it's not something you can learn in theory, so you need to learn by doing.
With this post, we hope to guide you in the right direction and help you build an action plan to find the right investor for your start-up and bring your business ideas to life!