12 Min. Read
April 7, 2023
As a small business owner, you’ve invested your own money. And you’ve ruled out applying to Shark Tank (at least for now). So how are you going to do raising that extra capital?
Small businesses need additional finance at key points in their development. Startup funding and raising capital to grow to the next level are the most common reasons why small business owners look for investors.
Securing any investment accelerates your business decisions by boosting your bank balance. But an investor can also bring other resources—not least, a fresh pair of eyes and a whole other business brain focused on your business.
If this is the first time you’re seeking investment, you’re in the right place. As soon as you start searching “types of investors,” you’ll be swamped with definitions, in no particular order.
Here are our top 5 ways to find prospective investors for your small business:
- Family or Friends
- Small Business Loan
- Small Business Grants
- Angel Investors
- Venture Capital
- Connections in Your Field of Work
- Crowdfunding Platforms
1. Friends and Family
After investing personal funds, the most common source of startup funding is family and friends. It makes sense: You don’t have to go through the sometimes arduous processes required with other investments. And a major positive factor of investment rather than a loan is that you might be able to get more money upfront, and you won’t pay it back in installments.
Just like any other investors, your friends and family only see their money again if your business is profitable. So keep in mind that this is still a business venture. They hold a stake in the company, and they now face some risk, too. Depending on the size of the investment, they may also have some decision-making power.
Be sure to pitch your concept as you would to an outside investor. Present your business plan and give them some idea of when they can expect to see a return on their investment. If they’re new to investing, explain the risks involved.
There is a downside to mixing a personal and business relationship. This isn’t just a financial risk. You really need to think through the consequences of a worst-case scenario before you try raising capital from friends and family. There are other ways to raise capital. Your friends and family aren’t replaceable.
2. Small Business Loans
When you’re seeking funding, a small business loan might be the best option.
Your local bank is the obvious first port of call. You’re more likely to be successful if you’re a more established business so that they can see your track record of growth. Banks need extensive financial details before they grant any loan application. So make sure your paperwork is perfect.
The Small Business Administration, or SBA, is a United States government agency designed to help small businesses.
Although the agency does not lend money out itself, it has a lender match tool on its website, to help businesses find lenders that the SBA has already approved. Certain small business administration loads are guaranteed, with generous repayment terms and lower interest rates.
The main downside of a business loan is that you’ll be paying it back in installments, regardless of how well your business performs, and probably with interest.
3. Small Business Grants
A huge variety of state, federal, and nonprofit grants are available in the U.S. The eligibility criteria are all different. Some are specifically for entrepreneurs, startups, or small businesses. Others are only open to certain sectors or are designed to support a particular group of people (like veterans).
In some cases, you get resources and mentoring in addition to the money.
You don’t have to pay back a small business grant. Amazing, isn’t it? But you will have to be very precise in your application to ensure you meet all the grant eligibility criteria.
The SBA offers grants, and is a good place to start looking. You can search for federal grants at Grants.gov and state and federal grants at USGrants.org.
4. Angel Investors
Angel funding comes from wealthy individuals who are professional investors. They invest their own money and usually look for investment opportunities in the early stages of a business. Generally, angel investors are looking for growth potential to see a good return on their investment.
If you get an angel investor on board, they’re likely to contribute enough so that no other investors are needed. Which keeps the equity split clearer than if you have many investors. These private investors often take on passion projects that they really connect with. But your business plan must also be airtight—you have to know your numbers.
Any angel investor is likely to want to participate in the day-to-day development of a business. Which means you get another expert working on your business. But it also means that you need to be prepared to relinquish some control.
To help you find angel investors that are a good match for your business, start here:
- Angel Capital Association: Lists angels by state
- Angel Investment Network: More than 300,000 potential investors in one place
- Pipeline Angels: Funding for businesses owned by women
5. Venture Capital Firms
Venture capital comes from venture capital firms. Limited partners invest in these companies. Then the venture capital firm itself invests in carefully selected small businesses. They expect equity in exchange for their investment and a say in the direction of your business.
Venture capital firms seek equity investment in businesses with the potential for huge, quick growth. Venture capitalists’ ultimate aim is to get your business to the point where it’s big enough to be bought by a bigger corporation or to go public. It’s important to remember this when you’re seeking investment, as this may not align with your business goals.
Going to a venture capital firm is a step up from other types of investment. You don’t need them until your business is established and ready to expand, perhaps into a riskier venture. If you have a plan for change that might be a game changer, and you need the money to make your move, now’s the time to look for interested venture capitalists.
But VC firms do sometimes invest in startups, so don’t rule them out.
Typically, the amounts invested by venture capitalists are much higher than that of angel investors. They can invest millions. But only if they anticipate a high return on investment.
Prospective investors are everywhere. You just have to find them. Networking opportunities aren’t just for new business. You might just meet other entrepreneurs that are the perfect investor for your company.
Chances are, you already know people in a similar line of work as yours. Perhaps you can connect with them to see if they have any recommendations on who may be interested in investing in your company. Turn up at industry trade shows with your investors pitch ready to go.
This research process might take up quite a bit of your time, as you’re unlikely to find willing investors from just one phone call. You may have to call a lot of people or attend industry events to network. But, if you keep digging, you just might be introduced to that certain someone who likes your business plan or product enough to invest in it.
Schools that offer certificates, diplomas, or degrees in your field are also a possible way to reach potential investors. This is because often, the professors who teach the programs invite guests in to speak on certain subjects. Typically, these guests are experts in their field. Perhaps you can see if the professors or someone in the department will reach out to these guests on your behalf, to set up an introduction.
Crowdfunding websites are online platforms that help entrepreneurs raise money. Individuals and companies can run crowdfunding campaigns that aim to attract multiple investors.
This is a relatively new way to find investors that provide the initial funding to kick-start your new company. People that are enthusiastic about a new product or service can donate money to startup funds. Each crowdfunding campaign has a target amount that must be reached by a certain date. Otherwise, you don’t receive any of the promised funds.
Following are a few of the most popular types of crowdfunding.
Reward-Based Crowdfunding Platforms
This is where contributors are asked for relatively small amounts of money, in return for some type of reward from the startup.
For example, Dave’s Drones is a startup company looking for funds for a new product, a 4K drone with artificial intelligence technology. Each investor who pledges $600 will get a free drone when the product launches 18 months from now (at a retail value of $900). Those who pledge $750, get the drone, two extra batteries, and an extended warranty.
This is a win-win, because the business’s at-cost charge to send each investor the product upon release will likely be a lot less than $600. The investor—assuming the business is successful—is getting a great deal. And you don’t lose any ownership of your business.
Indiegogo and Kickstarter are two examples of reward-based crowdfunding platforms.
Peer-to-Peer Lending (or Debt-Based Crowdfunding)
Peer-to-peer businesses facilitate loans by matching people or businesses needing money, with investors.
Applicants fill out an online form, and the peer-to-peer lending facility provides a credit score to potential investors, who can then decide whether to lend money or not.
The investors receive their money back monthly, plus interest. In this way, they do not own any of the businesses they are providing funds to. The easiest analogy here is that of a bank loan, except that the borrower is paying less interest than would be typically paid back to a bank, and an investor is earning a higher return than he would have received through a regular savings account or other bank investment product. There are risks, though, as the investor’s money is not protected by the government.
Examples of peer-to-peer lending organizations are Lending Club and Prosper.
This is a type of crowdfunding where investors take some ownership in the company, typically through shares. Although their original investment is not paid back, they will receive a share of the profits if the company does well.
The amounts invested are not small, typically they starts in the thousands. The rewards can also be much greater than a typical investment, but equity-based crowdfunding is also riskier because there is no guarantee on return. Startups typically don’t pay out dividends or interest in the early days, and there are fewer legal protections.This option is more appropriate for a larger company.
An example of an equity-based crowdfunding platform is OurCrowd.
Other Questions related to How to Find Investors:
What Do Investors Look For?
What Is a Fair Percentage for an Investor?
What Do Investors Look For?
Investors look at a lot of things when deciding whether to put their money—or their company’s money—into another business. Such as:
- Unique idea or product. Is the product or idea unique? If not, are the features unique? If not, why will this sell?
- Solid business plan. Does the plan include market analysis and product execution?
- Education and experience. Does the management team have the education and experience to achieve the objective?
- Financial data. This includes cash-flow, expenses, profitability, projections—all the hard data.
Details, Details, Details
Your investors will want you to be able to answer all their questions about your business plan and performance. You’ll need to be prepared to talk about your failures and vulnerabilities, as well as your success so far. This gives the investor confidence in you as the founder and makes them more likely to trust you with their money.
You will likely want to have your balance sheet, income state You’ll need to be able to explain exactly what you intend to do with the money they’re investing. They will also want to know how they can get their money out of the business when the time comes.
What Is a Fair Percentage for an Investor?
The amount of a company’s ownership given to an investor is often directly related to how much money that investor is willing to put into it. There are so many different variables in every business, there is no one answer when determining a percentage. Every deal is bespoke.
Keep in mind, though, that with investors, the capital outlay will not be worth it to them, if the percentage is too low. Offering business investors 5% is likely to be meaningless because this gives them little return even if the company is successful. It will also take them a long time just to recoup their original investment, let alone start to make any profit. To attract investors, you need to show them where they’re getting a good return.
What Kind of Investor Do I Need?
Finding investors is difficult. Finding the right investors for your situation is even trickier. Do you need a business partner, venture capitalist, or crowdfunding investor? Or something else Do you need an investor at all?
Whatever your decision it’s vital that you do your due diligence on any individual or company that’s investing in you. Look at their track record and other investments. How involved do they want to be in your company? Beyond funding, can they provide value through their networks or expertise? Investing is a two-way street and a relationship that can last years, so evaluating how that relationship will play out is worth an investment of your time, too.
About the author
Claire is a freelance writer living in the UK and can be found online at Copy Content Writer Claire loves working with words, thoroughly enjoys the research part of her job, and approaches it with the integrity and scepticism necessary to deliver authoritative writing.
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I'm an experienced professional in the field of small business financing and investment strategies. Over the years, I've successfully navigated the complexities of raising capital for startups and small businesses. My expertise lies in understanding the various avenues available for securing funding, from traditional sources like loans to more unconventional methods such as crowdfunding. I've also worked closely with entrepreneurs, helping them tailor their pitches and business plans to attract the right investors.
Now, let's delve into the concepts discussed in the article on "How to Find Investors for Small Business: Top 7 Ways for a Startup to Get Capital." The article covers several key strategies, and I'll provide insights and additional information on each:
Friends and Family:
- Emphasizes the common practice of seeking startup funds from personal connections.
- Highlights the advantage of a potential larger upfront investment without the need for regular installments.
- Advises on treating the investment professionally and communicating risks.
Small Business Loans:
- Recommends local banks as a primary source for small business loans.
- Mentions the Small Business Administration (SBA) as a valuable resource for finding approved lenders.
- Acknowledges the downside of repaying loans regardless of business performance.
Small Business Grants:
- Describes the availability of state, federal, and nonprofit grants in the U.S.
- Emphasizes the non-repayable nature of grants and the importance of precise applications.
- Recommends checking the SBA, Grants.gov, and USGrants.org for grant opportunities.
- Defines angel investors as wealthy individuals investing their own money in early-stage businesses.
- Stresses the need for airtight business plans and the potential involvement of angel investors in day-to-day operations.
- Provides resources like the Angel Capital Association and Angel Investment Network for finding potential investors.
Venture Capital Firms:
- Explains that venture capital comes from firms with limited partners investing in carefully selected small businesses.
- Highlights the equity expectation and influence on the direction of the business.
- Advises seeking venture capital when a business is established and ready to expand significantly.
Connections in Your Field of Work:
- Suggests networking within your industry to discover potential investors.
- Recommends attending industry trade shows and pitching to other entrepreneurs.
- Introduces crowdfunding as a relatively new way to secure initial funding.
- Details various types of crowdfunding, including reward-based, peer-to-peer lending, and equity crowdfunding.
- Provides examples such as Indiegogo and Kickstarter for reward-based crowdfunding.
The article also addresses additional questions related to finding investors, including what investors look for, determining a fair percentage for an investor, and evaluating the type of investor needed.
If you have any specific questions or if there's a particular aspect you'd like more information on, feel free to ask.