Learning how to find investors for a small business doesn’t have to be as stressful as you think.
It’s as easy as it’s ever been to find venture capitalists and other investors thanks to the rise of online resources and startup incubators throughout the U.S.
Knowing about the different kinds of investors, what they can offer and how to find the right one could give you a leg up when trying to finance any stage of your business’s growth.
Who Are Small Business Investors?
Small business investors are individuals or groups looking to finance businesses they believe have the potential to provide them a significant return on investment (ROI).
Investors share the same overall goal: make money. But they’re still people, each with different interests and characteristics. Learning more about who these people are is useful in your search to find investors for your business.
Many specialize in certain industries or business models. For example, an investor who has a history of working exclusively with construction companies would be unlikely to finance a restaurant startup.
Some investors have motivations beyond the realm of industry, choosing to help small business owners with specific racial, ethnic, religious or economic backgrounds. Clearly, an investor who wants to help small business owners in poor, inner-city neighborhoods would be less likely to fund a business in a wealthy suburb.
Small business tip: Just because an investor usually works with certain businesses doesn’t mean they’ll turn down a surefire money-maker. If your business shows enough potential, it could be worthwhile to check in with any investor you think can help you reach your goals.
Types of Small Business Investors
There are two main types of investors that small businesses use: venture capitalists and angel investors.
It’s important to know which type is best for you when you search to find private investors for your small business.
Venture capitalists (VCs) usually invest large amounts of money (from $100,000 into the millions) with a goal of matching it with a large return.
Venture firms generally invest the money of others, acting like a trade broker who manages stock portfolios. They do the due diligence necessary to make sound investment decisions, ensuring returns to the members of their group.
Venture capitalists tend to focus on businesses with huge growth potential that have opened up a full seed round.
If you’ve developed a groundbreaking app that has the potential to make millions of dollars, you likely will have VCs highly interested in getting in on the ground floor.
For most small business owners seeking smaller amounts of funding (below $100,000), VCs won’t find the modest returns worth their investment.
Note that many VCs will want to be involved with your board if you have one. This takes some of your power away. Also, if the company doesn’t perform, VCs could vote for new leadership to run your business.
What is a Seed Round?
Many companies open up a “seed round” of investments to raise money for early-stage expenses. This is your initial chance to find potential investors who can provide a large chunk of the funding you need.
Usually, a seed round ends with businesses raising large amounts of money, albeit with a price. This option likely will require you to give up a good bit of equity in your business.
Make sure you really need the amount of money you’re asking for and have the correct valuation for your business. The last thing you want to do is give up too much equity and not be able to reap the benefits of building a successful company.
An angel investor typically is an individual who invests their own money into smaller, early-stage businesses.
If you’re searching for a single investor or two and don’t plan on opening your business to a full round of investments, angel investors might be your best option.
Angel investors don’t typically get very involved in the businesses they back, so you don’t have to worry about placing them on your company’s board.
Many of these investors rely more on their gut feelings than a venture firm, which might make it easier to find angel investors for your small business. Appeal to their sensibilities.
Types of Investments
Depending on the stage your business is in and the investor’s preferences, there are 3 types of financing options:
- Equity investments
- Convertible notes
- Simple Agreement for Future Equity (SAFE) notes
This is exactly what it sounds like. You receive money from a business investor and in return they receive equity in your business.
Investors can cash out on this equity later or hold onto it and be involved for the long term (5-plus years).
A convertible note is a loan with a small interest rate. Instead of paying an investor back monthly with interest as with a normal small business loan, the agreement pays the investor in future equity at a discounted rate.
When your business opens up a future round of investments, the convertible note issuer will pay less per share at the new valuation. Any interest that accrues only adds to the amount of equity the issuer can receive at the date of maturity.
Created by startup accelerator Y Combinator, SAFE notes are similar to convertible notes. Although both offer opportunities to increase future equity, SAFE notes do so without interest rates, maturity dates and other requirements.
It can be difficult to put a valuation on startups and early-stage businesses. SAFE notes delay the need to do so. Once a priced round of investments occurs, the money an investor gives you in a SAFE note is converted into equity at the current valuation.
SAFE notes are mutually beneficial to you and the investor. They give you capital to expand your business while allowing them to earn equity at a discounted rate.
How to Find Investors for Your Small Business
Finding private investors for your small business has never been easier. There are multiple resources available through events, networking or even old-fashioned due diligence.
With the rise of crowdfunding and online investment groups, you’re one click away from getting the funding you need.
‘Demo’ or ‘Pitch’ Days
With new business ideas popping up every day, it can be difficult for investors and business owners to find opportunities.
Demo days (or pitch days, depending on the event organizer) get entrepreneurs in front of a group of investors looking to find the next big thing.
If you’ve ever seen the television show “Shark Tank,” you know what this looks like. Business owners pitch their ideas to a group of investors, who try to learn more about the company before setting up another meeting or negotiating terms of a deal.
Many investment groups and startup incubators hold these events, so make sure to follow these organizations closely to find the next date.
Small business tip: Many investors venture to trade shows, industry conferences and similar gatherings. Attending these events could get you facetime with investors interested in backing businesses in your industry.
Network, Network, Network
A simple way to find investors for your small business is to tap your existing connections.
Ask other business owners you know if they can introduce you to an investor they know or have worked with. Many angel investors will trust the word of someone they’ve worked with successfully, increasing the likelihood of a deal for your small business.
If you went to college, see if any alumni are able to help. Many are loyal to their school and fellow alums. They may help you find a business partner or investor when you need one.
Some colleges have created their own startup incubators and accelerators, designed to create a network of investors to help small businesses like yours find funding.
Your local chamber of commerce, industry organizations and Small Business Development Centers (SBDCs) all have connections. They may be a great resource to find investors looking specifically for businesses in your area or industry.
Explore New Connections
Sometimes you have to take matters into your own hands to find investors for a business.
There’s no guarantee, but you can find potential investors through cold-calling, emails or on social media sites such as LinkedIn.
If you know an investor’s background and what they’re looking for, you can narrow your search and improve your odds of finding success. Be personal and appeal to their sensibilities.
Use Online Resources
You now have multiple avenues to find investors for a small business online. The popularity of crowdfunding and online investment groups simplifies your search.
Online crowdfunding sites such as Kickstarter offer a way to fund smaller projects and fill in funding gaps that other investors haven’t.
Kickstarter is product-driven, which allows you to offer the product itself as a reward for investing. This keeps the equity of your business in your hands.
Angel Investors and Syndicates
Investors may act themselves or pool their money like a venture firm, having one lead take control of what’s called a “syndicate.”
Usually, these groups will want to meet with you in person at least once to vet your business. It’s common for them to offer convertible or SAFE notes when working with startups.
How to Make a Pitch to Investors
Making a successful pitch to investors is all about preparation.
Whether you’re networking, attending demo days or going online to find investors for your business, you need to have a rock-solid pitch.
Make sure you’ve done your due diligence finding the perfect investor for you. Focus on those interested in your industry, or who financed a business owner in a similar position.
Come prepared with financial data and projections. Include any sales you’ve made already and revenue forecasting data that suggests your business will continue to increase sales.
Visual aids are a good way to explain what makes your business different. If you have a proprietary product, you’ll want to include a quick demonstration to prove its value and show how it works.
For more tips on how to fund your business, check out more on our Beyond Capital blog.