Entrepreneurship is often romanticized, but it is no easy journey. Beyond simply creating an idea that seems unique enough to launch, it is not cheap to be your own boss. Starting a business has several fixed costs that can quickly add up, such as legally forming a company, paying for legal protections like patents or trademarks, and, of course, marketing and promoting your business.
This is where bringing in outside investors can be a smart move. Investors not only represent a cash infusion, but if founders are wise, these people can also help market, promote, and grow a business. However, finding people who are not only willing to invest in a young company but also have enough resources to support a fledgling firm can be difficult. So, where is a startup to start with finding investors?
Create A Business Plan
Serious investors are not interested in blindly investing in a business — even if they are relatives and friends (who are usually the initial seed investors for any startup). They need a prospectus and business plan that allows them to vet a startup properly.
Business plans can vary slightly, depending on whether the startup is already in existence or is still in the ideation stage. But a good business plan should include the following:
- Growth and market size
- Product/service road map
- 1 to 5-year business expectations
- Target market
- Identify competitors
- Customer profiles
- Value proposition
- Go-to-market strategy
Do not forget to include critical details like the current financial model. This should include an overview of the existing working capital available, as well as known fixed costs outlined on a 12-month and annual basis. If the business is currently active, also include a profit and loss statement that outlines how much revenue is being generated, monthly costs, and profits (if applicable).
While a fully fleshed, multi-page presentation is ideal for deeper review, entrepreneurs should also be able to create a one-sheet and have a quick elevator pitch prepared for more impromptu opportunities — such as at pitch events or when unexpectedly meeting someone that could become an investor.
Understanding Investor Levels
Once upon a time, a person had to be immersed in a high net-worth network to meet with investors. Today, the playing field is not exactly level, but it is much easier for businesses and entrepreneurs to connect with interested investors.
As mentioned previously, the first round of investors for most businesses is usually from within a founder’s personal network. This can be family, friends, or even former colleagues. In most cases, these are known as pre-seed investors since they are not typically giving large sums and usually come on board before the business officially launches or during the early stages. Pre-seed investors may be savvy but often do not always have the net worth to qualify as formal angel investors.
After a startup has exhausted its personal connections, angels tend to be the next step. To formally qualify as an angel investor, an individual must have a net worth of at least $1 million and earn at least $200,000 annually. Angels can be independent, but there are also angel networks where multiple angels will pool resources to create what is called a fund.
Angel networks can be country, region, or state-specific. They can also focus on specific types of industries or even only invest in firms led by founders from specific ethnicities, races, or genders. Today, connecting with angels is much easier, thanks to many of these networks’ dedicated websites and pitch submission processes. Meanwhile, sites such as AngelList, Republic and Gust are designed explicitly as angel matchmaking platforms to allow startups to create profiles and network directly with individual angels and angel syndicates.
This is not talking about GoFundMe. In the startup space, many direct-to-consumer (D2C) brands that want to go to market but might not have access to retail networks often rely on platforms like Kickstarter and IndieGoGo to get directly in front of consumers ahead of market launch. Although these platforms require businesses to meet the fundraising goals before funds are released successfully, this is a great way to connect with a target audience and build hype before officially launching.
Accelerators And Incubators
Although the terms are used interchangeably, accelerators and incubators are not the same. Accelerators are usually short-term networking programs that give early and newly established startups funding in exchange for equity. Usually, these programs are only a few months to network with other entrepreneurs in the cohort and sometimes with industry leaders.
By contrast, incubators are more long-term, with programs lasting anywhere from one to five years. These programs do not always provide access to funding but will include hands-on mentorship from angels and business executives with experience in a participating entrepreneur’s industry. While funding is not guaranteed, having access to business networking and the opportunity to present at seasonal startup pitch events can translate to corporate contracts and professional relationships. However, for either accelerators or incubators, entrepreneurs must apply and be accepted into the cohorts, with limited space offered every season.
Identify The Right Investors For The Startup
Identifying the right investors does not begin with targeting specific people. First, consider which types of investors make the most sense. Startups with less professional history may be better off pursuing angel investors, who will usually invest small sums of money in exchange for equity in early-stage companies. This can range from a few thousand dollars to as much as $25,000 per investor. Because these investors are willing to enter a deal at the ideation or beginning stages, they are more accustomed to holding deals for the long term.
By contrast, savvier institutional investors such as venture capitalists and hedge funds are usually willing to offer more money — but with heavier expectations and shorter turnarounds for returns. Startups that accept funding from these entities should be prepared for faster investor exits where returns are generated within a couple of years rather than delayed payoffs.
Consider Money vs. Expertise
Just like not all press is good press, not all money is good money. One of the biggest realities a startup needs to consider is whether a potential investor can add value to the business — or is simply looking for a quick return on investment. While all investors expect to see a return on their money, always review whether the startup is in a position where it needs outside assistance beyond money or would benefit from a seasoned investor with connections and network access.
If the business is established and simply needs a cash infusion to cover operational expenses or to expand, then an investor willing to provide significant funding for a quick return might be the smarter option. This investor may not have any desire to be hands-on and rather wants to align themselves with self-sufficient startups. By contrast, a young startup that does not have access to business networks and could benefit from mentoring should prioritize angel investors with experience and a comparable professional network in their industry to not only provide liquidity but also help build the business.
Get Serious About Funding
Doing it alone as an entrepreneur can only get a business so far. Eventually, startups need to branch out and seek outside financial assistance. Often, investors can be a smart alternative when more traditional funding sources like business or personal loans are not an option.