A few months ago, we shared an article on the different sources of funding for small businesses to offer business owners a basic primer on the options available to them. But since there are several types of private investors that small businesses can work with, we wanted to provide more information about these important partners. Finding the right investor for your business means understanding the different types there are, what motivates each one, and how to reach out to them.
Angel investors are individuals who want to see small businesses succeed and have the net worth and income to help make it happen. Often, these individuals have excelled in their own enterprises and want to see their money work for them. It used to be difficult to locate angel investors, but today’s technology makes it easier for angels to find ventures and start-ups they’re excited about supporting. Surveys by the Center for Venture Research at the University of New Hampshire indicate that the total U.S. angel investment market grew from $17.6B in 2009 to $24.1B in 2014.1
Working with a single angel investor means a business owner gets the opportunity to sell their vision for the funding’s use and help the investor see they’re putting money into a person they believe in, as much as a venture.
You might think that because angel investors are individuals they aren’t likely to take on risky projects, but according to Entreprenuer.com, the opposite is true.2 Working with a single angel investor means a business owner gets the opportunity to sell their vision for the funding’s use and help the investor see they’re putting money into a person they believe in, as much as a venture. However, it’s important to agree to clear terms about the role of the investor in controlling the company’s growth and direction, and define how their investment will be used and when they expect a return or repayment. You can find angel investors online through resources like FundingPost, which has been in the business for over 16 years, and the Angel Capital Association, which has a database of over 13,000 angel investors.
The key to finding a good equity investor is to have a secure business plan and strong projected growth, because equity investors expect big returns for big risks.
An equity investor puts money into projects based on a valuation of the company as a whole, in exchange for a stake in the company. The value of this investor type is they can provide a long runway before repayment is required. They offer up funding based on the promise of a future return that they’re willing to wait to trade in on while you grow the business. The key to finding a good equity investor is to have a secure business plan and strong projected growth, because they expect big returns for big risks. If an equity investor can see their ROI clearly, they’re much more likely to commit. The five major things these investors are looking for are good cash flow, liquidity, clear product analysis, expense control, and metrics, according to INC.com.3 The Minority Business Development Agency has excellent resources for researching equity investors in greater detail.
Peer to Peer (P2P) investing is when borrowers source loans from a third-party company that collects investment funds from groups of investors. These are ordinarily other businesses looking for new revenue streams, but can also be successful individuals. The organizational aspects of repayment to the investors and interest are handled by the third party P2P company, with interest and payments being determined by the investor’s risk. The P2P’s main concern is achieving good returns for the investors they brought on board. In the case that a funded project isn’t on track to achieve the ideal analytics, P2P investors can sell their loans to others, thereby limiting their own risk.
When finding P2P investors for your small or medium-sized business, remember that you represent an opportunity for seasoned investors to diversify their portfolios. Attracting P2P investors requires a clear message that your business is on track to bring in a high return on investment. This is most easily done when you can refer to your success in current endeavors, meaning P2P investments can be great for funding new phases of internal growth that lead to greater profitability. Two P2P companies are LendingClub and Prosper; both companies are highly rated by users and have quick turnaround times for loan approval, as brief as four days in some cases.
Finding the right investor to match your company’s needs can make a world of difference in operations over time. Making a plan, presenting the right information to investors, and taking the time to investigate your options and delineate clear ROI for potential investors are the first steps to a process that can help your company continue to grow.