How to Obtain Private Investors for Startups
So you’ve had a lightbulb moment and just came up with an idea for a business. It’s clever, profitable, and best of all, no one’s done it before! Now what? Well, unless you’re sitting on a Jeff Bezos sized fortune, you’re going to need some investment before you get much further.
For most startups and small businesses, financing usually comes from private investors. That is to say they come from individuals and other businesses, rather than from the government. Read on as we take a look at the most common types of private investment and explain how to navigate these relationships.
Where to Find Investors?
Where you look for investment for your startup will depend on a couple of factors, including your location, the options you have available to you, as well as the stage your startup is at. Below, we look at the four most common types of private investments and take a peek at what is involved in each.
Friends and Family
For startups and small businesses looking for early-stage funding, friends and family are a common first group of ‘private investors’. One reason for this is their familiarity with the founder and with the business itself. While it often takes time and effort to develop the sort of trust that is required for many other types of funding, with friends and family, this can often be expedited.
How to Make it Work
For a number of reasons, friends and family are often the first place founders turn for investment in their startup. While there’s no denying loved ones can be a relatively easy source of fast investment, it’s important to set your investors’ expectations to ensure the relationship doesn’t take a hit, even if your small business does.
The biggest thing to keep in mind here is to treat the relationship as that of a business owner and investor. By ensuring you have a written contract, show your investor the components of your business plan and generally be as transparent as possible, you can manage the relationship as smoothly as possible.
Perfectly encapsulated by Renee Zellweger in Netflix’s What/If, angel investors are (often wealthy) individuals who invest in a startup, often in the early stages, either on their own or by pooling their money with others in what’s called an investor pool. While many angel investors may make their living in the business world or the stock market, angel investment comes out of their own pockets.
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How to Make it Work
Navigating the waters of these private investors can be a little trickier than with friends or family members. Rather than investing out of the goodness of their heart, chances are an angel investor is looking to turn their investment into a profit.
For this reason, an angel investor will typically want one of two outcomes in exchange for their investment in your small business. An equity stake, which is a certain share of the company based on the level of investment and an agreed-upon valuation of the business, or a convertible note, which essentially delays the decision until a valuation can be made further down the road.
Either way, the most important thing to remember here is to understand what you are agreeing to. Many a startup founder has been wooed by a big check flashed in front of their face and forgotten to do their due diligence.
Whether or not you choose to seek outside help in this process, take your time and make sure you fully understand your investors’ expectations before you sign.
Mata also helps ease that transparency by allowing investors to track how your startup is doing as well as take care of all the legal matters. It has never been easier than this!
Like angel investors, venture capitalists are private investors looking to invest in ideas that are going to pay off in the long run. What makes VCs different is the fact that rather than investing their own money, VC’s are betting with that of their employer. Venture Capitalists typically only invest in a small number of startups each year, so they are looking for investments that are going to pay off.
How to Make it Work
The very nature of VC firms limits the type of startups that have a chance of receiving their funding. As the potential for big returns most often comes when a business is either sold or floated on the stock exchange, this is what VC’s will be looking out for.
When seeking funding from venture capitalists, most startups get their in through networking, often through an existing angel investor who has a relationship with the VC firm. Since VC’s tend to invest larger amounts than friends or even angel investors, it’s a good idea for startups to seek seed funding elsewhere as a starting point.
Private Equity Firms
Private equity financing is different from other forms of investment in that it’s not an option for all businesses. Private equity firms tend to invest in businesses that are more developed and are looking to achieve a particular goal or take the next step in their growth strategy. That means they’re especially picky when investing in small businesses. To help counteract the risk, most businesses eligible for funding from private equity firms typically have significant assets to leverage.
How to Make it Work
Similar to VCs, private equity firms invest in a business in the hope that it will increase in value in the future, providing a return on their investment.
While the source of their funding is similar to that of VC’s (e.g. pension funds), private equity firms tend to provide funding to more established companies based on proven performance rather than their future potential. Gaining funding from private equity firms is an option for more established businesses that are looking to either sell or achieve a specific level of growth.
As with VC’s, obtaining funding from a private equity firm will likely involve a pitch meeting with a team of investors. This is your time to shine! While the firm will have likely already done their own research, make sure you are on top of your numbers to build lasting relationships with private investors. Small business and startup owners have a leg up when it comes to financial growth.
Tracking investors may seem overwhelming. To counteract the hassle, check out Mata for creators. Use our project management tools to view funding rounds and manage budget operations appropriately.