What type of investment is best for your business?
Not all businesses need large capital investments. In some cases a mentor, with the right connections can further your business in ways that money cannot buy. Before you seek funds; research, evaluate, then proceed!
If you are unable to or do not wish to secure a business loan from a bank to fund your business startup or expansion, you may need to look at alternatives modes of investment. Some may have personal funds they can draw upon, others could turn to friends and family, but if those options are not available you may need to raise funds via an Angel Investor, Venture Capitalist or Crowdfunding.
There are different types of finance available depending on what stage your company is at; businesses just starting out, you will require seed capital, and those already established and looking to expand, will apply for growth capital, also known as expansion capital.
Seed funding is designed for early stage businesses, often to support the company to begin its operations and cover early operating expenses until it can generate revenue or is able to apply for further investment. Seed capital can be in the form of a loan, or in exchange for an equity stake in the company.
Expansion or growth capital is funding sought by relatively mature companies to expand or restructure, enter new markets or make acquisitions without changing control of their business. The company is more likely to be generating revenue and operating profits but be unable to raise sufficient funds to finance expansion. This type of funding is more often sought from venture capitalists who invest in exchange of equity in the company and/or a seat on the board.
Another method of raising capital for your business is through crowdfunding, using small amounts of money from a large number of individuals to finance a new venture or company growth. Crowdfunding brings entrepreneurs and investors together by making use of the easy accessibility of vast networks of people through crowdfunding websites and social media. Crowdfunding has expanded the pool of investors available to entrepreneurs, with many individuals keen to invest in the ‘next big thing’. If you have a good idea, are skilled at making innovative videos, and have the time, energy and network to launch a strong social media campaign, you could raise significant funds for your business.
Many crowdfunding projects reward investors with a gift or perk, although there has also been a growth in equity crowdfunding, with a small percentage of the company going to the investor in exchange for their investment. The crowdfunding site themselves generate revenue from a percentage of the funds raised. You should be aware however that when you set a target for funds, if you do not reach that target then the funds do not get released to you. You should be aware however that while there are successful crowdfunding campaigns, the vast majority fail. One of the leading sites, Kickstarter only had a 35.85% success rate as of July 2016 and Indiegogo’s was even lower, at 9.8% overall and 17.1% for fixed funding.
Key factors to consider when making a pitch for funding:
Raising investment funds is no easy task, you should be prepared to invest significant time in the endeavour. Fundraising can be a full time job in itself. Make sure you build momentum by taking the maximum number of meetings in as short a space of time as possible. If you have multiple founders, at least one partner should be devoted to fundraising.
Ensure you have a network in place before you start fundraising. Network with other start-ups and attend entrepreneur meet-ups regularly, the best introductions are likely to come from other entrepreneurs rather than investors.
Perfect your pitch. Investors are more likely to write a cheque if the idea they hear is compelling. They need to be persuaded that the team of founders can realise their vision and that the opportunity is real. It is not enough to simply deliver a slide show, particularly in the early stage of fundraising, you will want to build a rapport with your investor and have a conversation. You should have researched the investors you are meeting and have selected those that will understand your product or service, so you will already know why they are interested in your company and can focus on explaining how you will achieve your vision and how much your company can grow.
Most importantly, make sure you ask for a commitment from an investor when you meet them, do not expect them to make an offer. If an investor does not want to fund your business, ask for feedback that can help you in future pitches. Learn from any errors you make and constantly refine your presentation so that you can tell a good story of where you fit in the market and where you see yourself further down the road.
Do not offer too much equity too soon. Avoid giving away a higher percentage of your company in exchange for more capital. Do not part with more than a third of your company in the first funding round, you will want to keep enough in case you need to raise additional funds for expansion as your company grows.
- Make sure you know your numbers backwards and forwards, impress investors with your knowledge of your financial projections. If you are not confident with figures you can enlist an expert to help you prepare, so that you can present your business plan to investors assuredly, explaining what your market looks like, how your business will make money, and when you will break even and start making a profit.
Remember to include a salary for yourself when you are calculating overheads. Although there may be times you cannot pay yourself due to other expenses, ensure you keep track of this and put yourself back on the payroll as soon as possible. If you want your investors to respect you, you should demonstrate you respect yourself first by paying yourself.
Always Be Closing – ABC. Once you start fundraising, you need to always be in closing mode, you never know if the next person you talk to could lead to a funding commitment, either directly or through another introduction. Do not be discouraged by rejections, this is part of the process. Most importantly, believe in your product, assimilate feedback from meetings and keep improving your pitch and story.
Generally speaking seed funding is best sought from angel investors and growth capital from venture capitalists, but this is not universally the case. There are key differences between, and advantages or disadvantages to each type of investor, but the most important factor is to determine which type is more relevant to fund your business at its current stage. Without adequate funding, your business may not be able to realise its full potential, so take a look at the key facts below and do further research to decide which investor type is best suited for you.
The key facts about Angel Investors
- Angel investors are generally individuals providing financial support to small start-ups and entrepreneurs
- Angel investors are usually individuals who invest their own capital in businesses
- Angel investors, like venture capitalists care about their ROI, but are also motivated by other factors like:
- Personality: they may know or like the entrepreneur and want them to see them succeed
- Philanthropy: they feel good about investing in specific firms
- Perks: as an equity holder, they may be entitled to certain advantages like free or discounted goods or services
- Angel investors are comfortable investing smaller sums
The key facts about Venture Capitalists
- Venture capital is financing provided by a group of investors or a company to small firms they perceive to have long term growth potential
- A venture capitalist, typically works as part of a venture capital firm and invests the money of others expecting to make a profit
- Venture capitalists make investment decisions based on the ROI (return on investment) they expect or hope to receive
- Venture capitalists use several criteria when deciding whether to invest in a business including:
- Traction – only funding companies if they have revenues or, at least, beta customers or a prototype built
- Sector - most venture capitalists focus on specific sectors exclusively, such as healthcare or technology or software. Software for example has the highest chance of growing quickly and getting to a large exit (sale of company or IPO)
- Geographically – most venture capitalists will only invest in a certain geographic range, typically within 150 miles of their location