How to Find The Right Investors For Your Business: A Beginner's Guide
Whether you’ve already launched or you’re in the process of launching a small business, most companies will require some form of funding. This seed money, or “fundraising,” is critical for helping you scale to the next level.
Even billion-dollar companies, like Robinhood, undergo significant fundraising rounds to continue growing and meeting their business goals. So, how do you find investors for a business to help turn your dreams into reality?
This guide will cover what you need to know on how to find investors for small businesses. We will also be covering:
- Types of small business investors
- Ways to find investors and raise money
- How to win over investors
Types of Small Business Investors
Not all investors seek out the same businesses. Certain investors focus on financing early-stage businesses, typically offering smaller cash amounts in the five-figure range. Venture capital firms, on the other hand, provide large capital infusions in the millions of dollars.
Because small businesses are in their fledgling stage, it creates a certain dynamic between the company and investors. The most common exchange is money for equity. But since it is a start-up, it’s often a long-term bet. The right investor shouldn’t expect to recoup their costs for several years.
These days, there are five primary types of investors startups can turn to for capital:
Friends and Family
For many startups—particularly in the early stages—the first place owners go for initial funding is to the people who know and trust them. Since there is often little hard evidence for the business’ model itself, you need people that already know and believe in your idea and work ethic. This type of investment is more emotional than fiscal—they’re investing in you.
Since this is the initial investment, it doesn’t have to be a large sum; generally, the funds requested at this stage will range between a few thousand to a few hundred thousand.
That said, there are securities laws about accredited investors. These laws were originally set during the Great Depression to protect investors from stock scams. As a result, it’s technically illegal to take an investor’s money for your business unless they’re accredited, which is based on their salary and personal wealth. According to Legal Zoom:
“An accredited investor has annual earnings above a minimum limit or personal net worth above a minimum limit. The limits change, but it's in the ballpark of $250,000 of annual earnings for three years, or a net worth of $1 million.”
Peer-to-peer lenders are groups or individuals that provide small businesses with early funding. This could be done either via P2P lenders like LendingClub, or via P2P websites that use crowdfunding such as Kickstarter.
For instance, Oculus Rift—the virtual reality headset—got its initial funding via a Kickstarter campaign. The $2.4 million raised by Palmer Luckey from more than 9,500 individual investors allowed him to build out a working prototype. This eventually led to Oculus $2 billion acquisition via Facebook.
While banks may not be considered investors in the strictest sense of the word, they are a clear option to receive a capital infusion. It may be more appealing to take out debt for a loan than to give up equity.
That said, banks are not typically the best source of capital for early-stage startup investment. In order to justify the loan amount, they’ll want proof that you can pay it back promptly. As such, you’ll increase your likelihood of successfully obtaining a loan from a bank if you have already established a track record demonstrating business growth.
Angel groups and investors are professionals who can help with a seed funding round. Often they’re more willing to fund smaller projects than a venture capitalist would. Aside from the money, they can also provide significant benefits via connections, expertise, and business acumen.
But what does an angel investor profile look like? According to Ralph Kroman of WeirFoulds LLP, the typical angel investor:
- Has an income that exceeds $100,000
- Is 40 to 60 years old
- Has a net worth in excess of $1,000,000
- Has previous successful entrepreneurial experience
- Expects to hold on the investment for up to five to seven years
- Enjoys advising the entrepreneur and likes to be part of the action
- Invests up to $150,000 but may participate in a syndicate of other angel investors bringing the total investment up
- Refers deals to other private investors even if the angel has chosen not to invest
- Likes to invest in an industry with which the angel is familiar
- Sources deals through referrals
Similarly, there are angel groups composed of individual investors who band together. This minimizes their risk, allows them to invest more confidently, and provides even larger amounts of capital to start-ups.
VCs are the dream investor for any startup. They come with the deepest pockets, the most entrenched connections, and the greatest ability to help shepherd your business to the next level of success.
According to Forbes: “More venture capital firms are looking at and are participating in earlier funding rounds. Though it is much more likely these investors will show up and be secured in Series A, B, and C fundraising rounds than earlier.”
Often, a venture capitalist will invest a significant amount of money (typically in the millions). With this investment opportunity, the primary source of their returns is often through carried interest or a percentage of profits. A venture capitalist may be the right investor for your new business.
How Do I Find Investors for My Small Business?
Now that you know the main avenues of investment, how do you entice them into risking
their money on your new business or startup?
Start by following these steps:
#1 Build a Product that Provides Value
While this should go without saying, you will have significant difficulty obtaining seed capital if all you have is an idea. In most cases, investors will want to see that you can build a working model and can demonstrate:
- Your current value proposition and revenue figures
- What you’d need the money for
- How the investment would help the business scale
If you’re still in the concept phase, getting investment will be a tougher sell. You can strengthen your case to investors by developing a detailed business plan. As Harvard Business Review notes:
“A good business model answers Peter Drucker’s age-old questions: Who is the customer? And what does the customer value? It also answers the fundamental questions every manager must ask: How do we make money in this business? What is the underlying economic logic that explains how we can deliver value to customers at an appropriate cost?”
For example, let’s say you wanted to develop a better way for businesses to handle B2B payments, making it possible to grow faster, hire more employees, and pay better. That’s what our team at Ramp did. We created an (MVP) and a business plan, which we used to help raise more than $25 million in funding from Keith Rabois, Coatue, BoxGroup, Conversion Capital, Soma Capital, Backend Capital and more than 50 business angels—all before we ever launched publicly.
Should you be successful in your fundraising endeavors, investors may also request insight into how their money is being spent along the process. To gain full visibility into your expenses, Ramp offers real-time tracking of all company spend through their corporate card.
#2 Develop Personal Relationships
It’s challenging for small businesses to incentivize investment because it typically takes time (usually years) before the investor sees any ROI. Thus, it’s much easier to partner with people you already know and have developed relationships with, either directly or to have them provide a direct line to an investor.
Ideally, you want to enlist the advice and assistance of people who have entrepreneurial experience and professional knowledge. Remember, you don’t want cheerleaders; you need people who will tell you when you’re making mistakes. Small businesses balance on a knife’s edge when it comes to success and failure. Therefore, it’s critical that those closest to you aren’t just telling you what you want to hear or giving you money for the sake of it.
Your personal connections typically won’t account for significant business investments; however, they could provide critical seed capital or help you make connections to bigger investors such as angel investors or VCs.
Similarly, networking has long been the lifeblood of startups. And these days, there are a variety of networks you may wish to consider, such as:
- Alumni networks
- Fraternity or sorority connections
- Industry trade organizations
- Small business development centers
#3 Online Fundraising Platforms
As mentioned above, there are a variety of sites and services that help connect startups with potential investors. According to Forbes: “The past five years have given birth to virtually countless online fundraising platforms. They have become highly popular with sophisticated and accredited individual investors, angels, and even banks and funds looking for new ways to deploy capital.”
Most of these platforms run on a P2P investment model. And while there are several you can look into, the most popular include:
#4 Attend Events
Often, the difference between a successful startup and a failed one comes down to visibility. You must be seen by the right people.
How do you do this?
For starters, there are dozens of events and trade shows that are expressly built for budding entrepreneurs to exhibit their business idea. Often, VCs and angel investors are in attendance, looking for their next million dollar investment. Popular industry trade shows include:
- TechCrunch Disrupt
These shows represent an opportunity to meet both entrepreneurs and investors. It allows you to see whether there is a demand for your startup or tweaks that need to be made. It also gives you a chance to hone your pitching skills.
#5 Apply to Accelerators or for SBA Loans
Similarly, many startup accelerator programs like AngelPad have an open invitation for applications from fledgling businesses. If accepted, you’ll likely receive some initial capital and plenty of networking support. They’ll help you develop your pitch and provide opportunities to sell the idea to investors.
Another potential avenue is applying for a Small Business Administration loan. While the agency itself doesn’t provide loans, it has a lender match tool that can help businesses find loans and provide grants.
How to Win Over Investors?
Let’s say you’ve set up a meeting with a potential investor. How do you reel them in once you’ve got them on the line?
While every business is different, there are some general practices you can follow:
- Show them the money – Financials talk. If you demonstrate that you’re providing value and have room for growth, you won’t need a fancy pitch. Keep it short and succinct and allow the money to speak on your behalf.
- Know the market opportunity – Per Jeremy Bloom, CEO of Integrate: “The most common mistake that I see as a judge on CNBC's Adventure Capitalists is that the entrepreneur doesn't know how big of an opportunity his or her product has. The more tempting you can make the market size, the more persuasive your deal will appear. Focus on big ideas, not a lifestyle business.” Your business plan can help you better gauge the opportunity.
- Be authentic – A part of selling is acknowledging when you don’t know the answer to something. If they’re going to trust you with their money, they need to trust you as a person. Don’t put on an act. Instead, be genuine and let them see who you are as a person.
- Over-prepare – Be sure that you’ve done everything in your power to win over investors. Take the time to consider every avenue and angle, continuously practicing and honing your pitch all the while. Know who you’ll be speaking with. Take the time to research what they’ve accomplished in their career, and how their expertise (apart from their capital) can help your business.
Ramp - Helping You Manage Your Spend
If you plan on scaling your business to its full market potential, odds are you’ll need some help along the way. While some businesses successfully grow through their own revenue, most will need an external capital infusion. Earlier last year, for example, we raised yet another round of investment—another $30 million in new funding.
Whether you’re seeking investment from friends or family or through a major VC, it’s important that you demonstrate to them that you’re conscious about your spending habits and cash flow.
For that, Ramp can help. Ramp is the first corporate card that comes with automated expense management. This powerful integrated platform gives you greater visibility and control over your spend. With Ramp, you can optimize your existing business, streamline workflows, and minimize waste. By embracing the healthy financial habits of a successful company, you can convince potential investors that you’re taking your business seriously.