Starting a business takes money. That’s just a fact of life. Unless you’re independently wealthy or an incredible saver, not all of it can come from your bank account. That means you’re going to have to convince other people to believe in your business as much as you do. Knowing how to find investors is an essential but time-consuming task.
Startups rely on several different types of startup funding — plus loans, if needed — to raise the capital required to set up business operations and develop and launch a product. Keep in mind that each type of investor is looking for something different. Who you approach depends on how far along your business is and what you’re willing to provide in return. Let’s explore how to find investors a bit more.
Types of startup investors and lenders
- Friends and family
- Small business loans
- Angel investors
- Venture capital firms
Friends and family
Once you’ve spent as much of your own money as you’re willing to part with, it’s time to turn to friends and family. Most people don’t want to ask their loved ones for money, but not much other funding is available before you’ve launched your product.
When you tell people about your business, some may offer to invest on their own. After all, your friends and family believe in you, which means they believe in your talents and your ability to succeed.
If you decide to ask your loved ones for funding, carefully consider whom to approach. Who has enough disposable income and savings that a potential failure wouldn’t jeopardize their financial future? Rather than requesting thousands of dollars from a few people, could you ask a larger pool for smaller investments in the $200 – $1,000 range? Is there anyone whose money you would feel uncomfortable taking?
To the extent possible, treat friends and family investors with the respect you would treat other investors. They should see frequent communications, detailed tracking of their investments, and appropriate legal paperwork.
No matter who gives and how much, be sure to keep detailed records. Make sure everyone understands the terms of the deal — is this an outright gift, a loan with a particular interest rate, an investment for equity in the company? What kind of return on investment (ROI) can they expect, and when might they make the money back?
At the very least, ensure everyone understands there is no guarantee they’ll see their money again — and ask them to sign the appropriate legal paperwork. The last thing you want is to get into a legal battle that ruins close relationships or divides the family.
In short, it’s common for founders to raise money from friends and family in the pre-seed and seed stages, but it’s best to put a lot of thought into the details to protect yourself and your loved ones.
Small business loans
Loans are another option for pre-seed and seed stage funding. If you don’t want to approach friends and family — or don’t have that alternative — then a loan can provide the capital you need to structure your business and launch your product.
The Small Business Administration (SBA) backs loans for businesses that range from $500 to $5.5 million. Lenders offering SBA-backed funding are more likely to take a chance on a startup without a proven track record, because the SBA reduces risk and enables easier access to capital.
Think carefully before you take out a small business loan, though. You’ll have to make regular payments, including interest, which is not required with other types of investments. Those payments may be difficult to manage before you’ve launched your product and found customers, so you’ll need a plan for how to pay the loan back.
According to recent data, interest rates have been steadily increasing, making money less inexpensive compared to previous years. Plus, a large debt burden can make you less flexible as you adjust your business strategy or adapt to market changes. Finally, debt may make you less attractive to angel investors and others when you’re ready for Series A.
Every founder wants to find an angel investor to make their dreams come true. But this type of investment can come with its own challenges.
The seed stage and Series A round are ideal times to bring an angel investor on board. These are wealthy individuals who use their own money to fund startups they believe in, often in industries they have personal experience with. They also provide invaluable mentoring and networking opportunities that can give you a leg up on your competition.
In return for taking a risk on you, an angel investor — or a group of them — often wants not just equity in the company but also influence over company decisions, including strategy, hiring, and product development. If you and the angel have similar goals and opinions, their involvement can help your startup succeed. But if they ask you to make choices you disagree with, you may regret ever taking their money at all.
In short, approaching angel investors is a great way to raise capital for your early-stage startup, when venture capital firms won’t yet get involved. But be sure you know enough about the investor’s personality, approach, and objectives before you accept any offers.
Venture capital firms
Unlike angel investors, venture capital (VCs) firms invest other people’s money, not their own. VC firms pool money from their clients to fund startups and early-stage companies. These firms are looking for a high return on investment for their clients, so they likely won’t fund a startup before Series A — in other words, before a successful product launch that proves the business model.
Like angel investors, VC firms use a thorough due diligence process to evaluate potential startups. They want to see a comprehensive business plan and a solid operational foundation. VCs expect equity in the company in return for their money, and the firm’s managers may become involved with the board of directors to keep a close eye on their investment.
Venture capital is typically the largest and most sought-after type of investment. Landing VC funding means your startup is already making money and will likely continue to grow. It may take years to reach this stage, but once you’ve made it, you’ll know you’ve structured your business for success.
Here are a few helpful articles that we looked at for inspiration on how to find investors when writing this blog:
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