How to Raise Money from Investors
You benefit because you can raise enough money to grow your business, and the investors benefit by sharing in the business’s profits.
The trick is to find investors who are willing to take a risk on your company. Although some investors prefer to put their money into companies that are large and proven, others are eager to buy a piece of a newer, smaller company that they hope will earn them money.
Before you approach people, decide how much money you want to request. Write a business plan that indicates how much you need to buy or lease equipment, run an effective marketing campaign, and other expenditures.
When you ask for funding, focus on small dollar amounts. Don’t ask one individual to buy a large share of your company, unless you want to give up much control to one partner. Instead, try to get financing from several investors, thus spreading the risk. Some investors won’t put their money into a new endeavor if they think no one else will do the same.
Types of Investors
Some investors are successful business owners who have sold their businesses, have large amounts of money, and would like to get involved in starting or growing another business. Other investors are simply your family and friends who might have limited money and little business experience, but they want to see you succeed.
Both types of investors want to know how they will benefit from giving you money. Prepare a presentation that shows how you will market your business, how much revenue you expect the company to generate in the first few years, and how you will spend their investments.
Avoid sales clichés. Don’t tell people they need to invest quickly. Don’t use phrases like “once in a lifetime opportunity” or promise huge returns on their money. Make sure your presentation is free of all errors and typos. Use concise, clear language.
When you approach potential investors, make sure you are clear about whether you also want their advice or expertise. Some investors want to be able to take some control of your business. Others will want to be silent partners who don’t need to work next to you every day, and will be satisfied with regular updates.
How to Find an Investor
Start with your warm market, your friends and family. Then ask your friends and family if they know anyone else who might like to invest in your company. Ask your accountant, lawyer, banker, and others. If you are getting advice from a SCORE counselor or an expert at your local Small Business Development Center, ask them where to find investors. Approach those potential investors the same way, with research and facts.
Then start networking. Reconnect with people with whom you’ve lost touch, such as former coworkers, acquaintances, and friends of friends. Join your chamber of commerce, trade associations, and other groups where you will meet people who understand business and who are interested in getting involved in a company. Take a business-related course at your local community college or other educational institution, and be sure to attend seminars and other events. Also consider volunteering at organizations that might be relevant to your business.
You might also seek angel investors, high net worth individuals who invest their money in private companies. They might invest a few thousand or millions of dollars. In general, angel investors don’t like to be approached by strangers with business opportunities, so they join associations that bring together investors and business owners.
Finding People on the Web
There are also ways to find people online. Popular web sites such as MySpace and Facebook invite people to get to know each other socially. MySpace also has groups such as Money and Investing, where people go online and form communities. There are also listserv groups and message boards on the Web. Do a search on “small business message board” or similar words.
Groups such as LinkedIn help you find people by connecting through someone you already know, who knows someone else, etc. You can set up a free basic account, or pay for an account that has extra features and costs anywhere from $60 a year to $2,000 a year.
There’s also Genesis Exchange, which matches investors and small business owners looking for investment. The site gives businesses a Genesis Score, which measures how attractive your company is to investors, based on your management experience, whether you have patents and copyrights, whether you’ve written a presentation, and other factors.
Be cautious when you use the Internet to raise funds. Avoid scams, such as people who ask you for money before they invest in your business. Some sites attract people who are not legitimate investors. Follow the basic rules, such as not giving out your bank account or credit card information.
You can also find people through Meetup.com, which lists groups that meet for everything, including to discuss business opportunities or entrepreneurship. Sites such as Craigslist also let you post your business opportunity, under the business/commercial category.
Finding a Partner
If one person is willing to put up a lot of money, and he or she wants to be involved in the daily aspects of your business, you can make him or her a partner. In a partnership, all partners are personally liable for the business debts and liabilities. For example, if one partner gets sued for something business related, that means all partners will be financially responsible if your company loses the lawsuit.
Choose a partner carefully. Don’t just present your business plan and ask for money. Interview the person and make sure they are the experts they claim to be. Ask how they handled certain business crises, how they increased sales, and why they are interested in your company. Ask if you may speak with a person they have partnered with in the past. Also think about whether you really want a partner, because you will likely spend a lot of time with this person.
Some web sites contain the fine print, “This is not an offer to sell securities…” That’s because there are SEC rules about offering equity, which means asking people to invest in your private company. In general, you cannot place an ad in the paper or make a public appeal for investments in your company unless you register with the SEC. There are exemptions to this registration rule, based on the amount you solicit and other factors. Check with the SEC or with your attorney.
If you do get money from friends, family, and strangers, consult a lawyer to write an agreement. Make sure the investors know that they are not loaning you money. The written agreement should spell out how the investor will earn money, which might be in the form of scheduled dividends, or they might only receive money if you and they sell the business.
The contract should state whether the investor is a partner who has authority to hire employees, write checks from the company account, and other tasks. Make sure the contract includes information about how the investment can be terminated. HBM