By Caron Beesley, Contributor
Although small businesses still turn to credit unions, community banks, and traditional banks for their capital needs, outside equity such as angel investment and venture capital, are valid options. In fact, the venture and angel capital industries are experiencing a sharp increase in demand thanks to a greater certainty in the domestic economy.
If you’re looking for a private equity firm, venture or angel capitalist to fund your business, what are your options? Below are some tips for identifying the right fit for your needs and taking those important first steps.
Option 1: Private Investment Market
The term venture capital has become synonymous with high-growth start-ups. But how does it differ from the traditional financing sources? Typically, venture capital:
- Invests equity capital, rather than debt
- Takes higher risks in exchange for potential higher returns
- Has a longer investment horizon than traditional financing
- Actively monitors portfolio companies via board participation, strategic marketing, governance, and capital structure
Within the venture capital community, there are several types of investors with slightly different approaches. The SBA Venture Capital Guide provides a solid overview of the various investment options that are open to high-growth startups. Here’s a brief summary of what you need to know:
- Private Equity (PE) – PE covers a number of investment types that are usually made by private individuals or privately-owned institutions (usually a private equity firm). The money can be used to purchase a company, fund a project, or make a straight-out private investment.
- Venture Capital (VC) – This is also a form of private equity, but is managed differently and is usually designed to fund startup companies that have the potential for high growth (very popular with technology companies). Venture capitalists not only provide money, but also business planning expertise and assistance to help startups succeed in its industry. According to SBA data, venture capitalists have increasingly moved their focus to firms in the expansion phase.
- Angel Investing – Angel investors are high-net worth individual investors (usually former entrepreneurs) who seek high returns through private investments in startup companies. They provide similar startup financing as venture capitalists but usually in smaller amounts. Angels often look for something in return for their investment such as a place on your board of directors or participation in day-to-day operations. The angel market has experienced a gradual upward trend in recent years, with a steady shift towards later stage investments (SBA).
Option 2: Government Venture Capital Programs
Another venture capital option is the Small Business Investment Company (SBIC) Program, available through the SBA. Over the past five years, the program has channeled more than $21 billion of capital to more than 6,400 U.S. small businesses spanning a variety of industries across the country.
Some of the country’s most successful and recognizable brands received SBIC financing during their early growth stages, including Apple, Costco, Intel, Outback Steakhouse, and Jenny Craig
The structure of the program is unique in that SBICs are privately owned and managed investment funds, licensed and regulated by SBA, that use their own capital plus funds borrowed with an SBA guarantee to make equity and debt investments in qualifying small businesses The SBA does not invest directly into small business through the SBIC. Read more about the SBIC Program
Where to Find Potential Investors
If you have a good network then there’s a strong likelihood you can pinpoint potential investors via this route. So start locally and branch out from there. Here are some tips and resources that may help:
- Look to Your Business Community – If you are involved in a local Chamber of Commerce or other small business group, talk to experts and business peers alike. Small Business Development Centers (SBDCs) or SCORE Mentorsmay also be able to help introduce you to local investors.
- Business Capital Brokers – These maintain networks of potential investors. A good broker can help position you with a potential lender.
- Consider Trade Associations – Most industries are represented by a trade association, this is another great place to expand your search and meet potential investors. You can also look into national and local investing and venture capital groups like the National Venture Capital Association and the Angel Capital Association.
Making Your Pitch
Securing investment requires a planned selling strategy on your part to ensure that you diligently communicate the potential of your business and that you meet the investor’s criteria.
- Do Your Research – Knowing your business is critical, but you also need to know your investors. Thoroughly research both. Be prepared to answer questions about your long-term growth plans.
- Fine Tune Your Pitch – Once you’ve done your research, fine tune your sales pitch based on the motivations of the investors and give them a good reason to want to invest in your business.
- Lean on Your Business Plan – Be sure to include accurate and realistic financials and market research to back up your predictions. Plan on being able to confidently communicate key sound bites from your plan on the fly—particularly how you will generate profit and how that will flow into your investor’s pockets. Checkout SBA’s How to Write a Business Plan guide for tips and templates.
What to Expect During the Investment Phase
Once you’ve submitted your business plan and made your case for investment, what can you expect? Learn more about the next steps in the venture capital process.