A Quick Guide to Choosing Investors


So you’ve created your business plan - opting not to go with banks or other lenders for financing - and you’re about ready to make your pitch to a hundred prospects. What now?

Getting funding from investors can feel as frustrating as auditioning during a cattle call. Keep in mind that you still have to consider what’s right not only for them, but for your startup as well. Like with any business contract, the risks and benefits go both ways—if you jump on offers that aren’t the right fit, your business may quickly find itself on the line. Choosing the right investors could bump your business up to where it should be and save you a number of shareholder worries later on.

Kinds of Investors:

  • Venture capitalists – these are usually groups or firms who invest in businesses in order to see financial gain. Along with having more funds to offer, venture capitalists could give you access to some portfolio benefits, follow on capital, and media exposure. As equity investors, they generally favor funding tech companies and companies at a post-startup stage.
  • Angel Investors – past entrepreneurs could take a personal interest in your business and become private investors individually. An angel investor is usually more open to funding businesses in the seed stage in exchange for equity.
  • Crowdfunding – this financing vehicle is made possible when individuals pool together money for a business that is pre-selling products or services online. Startup founders have the opportunity to sell their idea directly to the public. By delivering a product or service in return, startups are able to source the investment without acquiring more shareholders. This can also serves as a way of testing their market.

Each one works well with different businesses, stages and funding needs. As you go down the list, the kind of funding becomes more and more democratised, which makes the latter options increasingly more attractive to startups and small businesses. In order to find the right fit, you should be looking for investors who possess the following:

  • Interest in the business concept – when someone gets what your vision is, they become more willing to invest in your company. It also makes it easier to find someone who has your company’s best interests in mind, not just theirs.
  • Cash availability – if your prospect is taking too long to make a decision and your company needs cash fast, it may be time to consider other investors.
  • Experience, references, and networks – this isn’t always a necessity, but for some founders, it can be a better deal than receiving larger financial support from equity holders.
  • Reasonable equity demand – giving up more equity means allowing more ownership and participation from the investor’s side of your business. This also means sharing part of the responsibility of running it, as most investors are concerned with how much success the business is bringing in, both for their benefit and yours. Bear this in mind when negotiating just how much equity you’re giving them in exchange for funding.
  • Chemistry with your staff – if you are taking on equity investors, be prepared to interact with them regularly regarding how you run your business. Know that it is okay to accept a smaller offer if you feel that your relationship with the investor will benefit you in the long run, and to say no if you aren’t able to handle their attitude regarding your management.

When you’ve found the right investor, remember to make a formal agreement you can use as a reference as your business runs its course. This is to avoid future conflicts between you and the shareholders you acquire. It will help you keep track of any deadlines you have on returns or delivery of service and supplement the business plan that you’re using as a guide.

If you’re looking for more business advice on keeping up with your business plan, our management consultants are here to help. Take this free TRUST Assessment to help us figure out what your business’s specific needs are.

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Topics: Finance

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