These days entrepreneurship isn’t boiled down to individuals joining family businesses or turning into part-time business(wo)men to make the big bucks and live the high life. The ‘giving back to society’ concept has apparently taken precedence among businesspeople allowing them to demonstrate acumen and know-how to build creative solutions and so address at least one of the multiple social problems. The rise of fintech in the Asia Pacific region with its focus on the under- and unbanked can be a good example here since most startups deal with lack of lending availability, remittance options, and affordable insurance.
The question ‘how to attract investors to your business’ is a hot topic for not only early-stage proprietors but also for more experienced owners looking to scale. No matter how agile your team, or how great your product or idea, or how sustained your growth is, having enough reserves is vital to get to the next milestone and achieve the full potential. This is one of the main reasons why even the most successful and well-funded startups continue engaging in funding rounds.
Having worked with a myriad of entrepreneurs and going through various growth phases together, it becomes obvious that there are certain trends and regularities in terms of what it takes to sustain and rise within the entrepreneurial path. And, more importantly, what it takes to evolve from idea to a stable business. With smartness and community commitment turning into main criteria, your entrepreneurial traits and ability to establish the right connection are not diminished.
We’ve prepared the ultimate guide for those of you, who are not sure if they have all the right stuff to attract small business investors, who don’t know where to find investors online, why the latter may say ‘no,’ and how to pitch a business idea to investors in the right way.
Five Types of Investors for Startups
We’ll hardly surprise you by saying that there is more than one type of startup investors for raising funds. However, how are they different? What type will be a better match for your business at this particular phase? Let’s put things in perspective.
- Angel investors. These days there’re around 345,000 angel investors for startups in Europe and about 300,000 in the United States. In most cases, these are prosperous entrepreneurs, corporate leaders, and business experts wishing to support creative projects that may not fit in the conventional gospel and experience difficulties obtaining more typical forms of financing. Attracting angel investors, it’s essential to keep in mind a few things: they’re willing to finance smaller operations, and it’s better to reach out during seed rounds and beyond.
- Venture capitalists (VCs). This type of investor comes with bigger checks and interest for highly lucrative firms. At this stage, it’s critical to have a clear and solid business plan for investors since VCs not only conduct due diligence but also rarely invest in risky affairs. Business owners should also consider the fact that partnering with venture capitalists they share their company ownership. VCs may actively participate in your operations, have a seat on the Board of Directors, and be interested in adding value to improve the return on investment (ROI).
- Corporate investors. Large corporations often launch their own incubators or accelerators to grow new opportunities. Meanwhile, some prefer to invest money in external startups. Corporate investors can assist you in bringing business to the next level, but this partnership requires patience and time during the initial phases. Collaboration is critical, so make sure that you share common values and goals to prevent controversion. Nevertheless, the so-called business-to-business investments bring in numerous benefits to reputed companies since it’s a chance to find talent, tools, and technologies to increase the market share and revenue despite the market dynamic.
- Personal investors. This category includes friends, relatives, and other personal contacts. We can call it the ‘investment front line’ since it’s the very first type of potential investor most entrepreneurs are approaching. Looking for private investors, don’t mix family with business. Start with preparing a contract to spell out all the terms and so prevent possible misunderstandings. Document all the investments and make sure that each party signs the agreement.
- Banks and governmental agencies. Though these are not real investors like the ones listed above, they can also become a source of funds at a certain time. For most early-stage startups, incumbent banks aren’t an easy capital source, but as soon as you pick up the momentum, they may propose credit lines, advance loans, and company credit cards. Meantime, winning a government grant isn’t easier, and this type of investment entails repayment. Too often, governmental programs include certain restrictions that may turn out burdensome for your business, so take time to review the requirements carefully.
As you can see, there are a plethora of options for businesses looking for investors. Some of them are said to be restricted to particular stages, funding rounds, or business maturity. Though nowadays, those limits are often blurred. So how to make sure that your idea or product is just what investors look for?
How to Become the Best Business to Invest In?
An investor’s decision-making process is consistent, insightful, and elaborated. They are highly experienced at assessing opportunities and detecting risks, so investors are often said to have a nose for good deals. However, every investor has certain criteria that they pre-check, so no matter how innovative your product is or how passionate you’re about the idea, thorough preparation is vital. Otherwise, you will not only waste their time but yours likewise. So what are the top three factors you should pay special attention to?
If we cut to the chase, investors don’t put money into ideas or products, as they originally invest in people. Most VCs admit that they appreciate the drive and identity of the founders or management team. They expect to see a large degree of your personal investment in the process, and here we don’t talk about money, but about your blood, sweat, and tears. If you don’t want to invest in your idea, they will never do that either.
Summing up, investors looking for entrepreneurs wish to find experience, confidence, and security. What does that mean? — It’s the interplay of such factors as knowledge of the industry from the inside, understanding of business operations, the existence of a plan, ability to distribute and manage funds wisely, and adherence to the idea.
Game-changing products are introduced regularly, but most of them are launched “unprepared” and thus fail to win the market. The preliminary research of the market is one of the key criteria to attract consumers and investors.
Gaining insights into the potential users and their pains/goals/expectations, competition and market availability, potential costs and revenues, all these factors are critical for investors looking for app ideas. For instance, if your intended market is monopolized or unprofitable, investors will pass up any opportunity of funding. Lack of information about potential users and their interest is mainly seen as poor preparedness and thus may hurt your chances of bringing investors into the business.
Meanwhile, if we’re talking about existing markets, you should be able to explain how your product differs and what new it has to offer to the audience. Business owners wishing to start a new market direction or enter an emerging niche will need to provide data demonstrating market evolution and sustainability, and so starkly illustrate business investment opportunities.
All while the previous two factors define your ability to receive funds, this criterion determines their value. A comprehensive and quality business plan for investors demonstrates your involvement in the process and the potential to move forward.
Preparing and presenting a business plan to investors, be sure to cover the following aspects:
- Business concept to give a full overview of your product and explain what value it has and what user needs and issues it addresses. It should also outline your business structure, marketing and sales schemes, operating plans, as well as overall goals and objectives;
- Market insights to give small business investors a better understanding of your target audience, its demographics, behavioral patterns, and psychographics. This section should also include competitor analysis, segmentation of the market, and potential market share;
- Financial data comprise the statement of financial condition with equity, liabilities, assets, preliminary profit and loss statement, cost-volume-profit analysis, and other financial metrics.
The new ways and methods to pitch your business idea to investors constantly arise, all while business plans still play a pivotal role in the decision-making process. You can change the structure or complement it with custom sections to adjust it to the requirements and objectives of today’s lean startups.
Best Places Where to Find Investors for Your Business
So now you’re ready to meet your potential investors, and you’re aware of their main criteria and concerns. This brings up the question of where to find them since the chances to receive a casual call from investors looking for investment opportunities are next to none.
- Recently, online fundraising platforms have grown in popularity among banks and individual investors looking for new ideas. Such websites include equity crowdfunding, donation-based, and debt portals. Among the most respected are: Kickstarter, SeedInvest, Indiegogo, AngelList, and Wefunder.
- Accelerators and incubators can not only turn into your source of capital but also a connecting platform for entrepreneurs and investors. Traditionally accelerators have demo days where founders introduce their projects to mass media and investors. It’s a great opportunity to build brand awareness and make useful contacts. Additionally, such programs offer technical, business, and legal advice. Among the undisputed leaders are Y Combinator, 500 Startups, and Techstars.
- Attending events and meetups, you increase the chances of being noticed by investors and gaining better visibility. You can also try to find out who is going to visit a particular event, reach out to them, and arrange a short meeting beforehand. There is a vast variety of occasions, and everything depends on your business industry, but you can start with checking WebSummit, Money2020, or COLLISION.
- Social media is one of the most cost-effective ways to find investors for business and reach out to them. You can either follow a typical inbound strategy (including posting your updates and sharing relevant news) or take a more proactive approach (namely direct messaging, utilizing sponsored posts, collaborating with industry leaders). The most popular platforms are LinkedIn, Twitter, and Facebook.
- These days blogging can turn into a powerful tool for a new business looking for investors. Moreover, you don’t even need to create your own blog since you can use Medium, LinkedIn, or reputed websites that accept external articles to tell your story and share insights.
How Do Investors Decide Where to Invest Their Money or Why Do They Say ‘No’?
Unfortunately, accepting refusal is one of the many skills every entrepreneur should work on. You should continue trying and never lose faith in your idea. VCs often don’t spend time explaining the reason for rejection in detail, and we’ve decided to list the most common ones, so you could make essential changes or polish up your business pitch to investors:
- The opportunity isn’t big enough since investors anticipate little to no returns. This situation mainly refers to hyper-focused products, and it may be better to turn to angels or personal investors;
- The market is too small so far, and it’ll take much time for your target users to see the product value. Such companies need more investment to stay afloat waiting for the world to realize the benefits, though investors don’t like waiting;
- Your company doesn’t have a competitive edge, or it’s too weak, so competitors may easily put spokes in your wheel. It’s a common scenario for startups with no great technical component, which makes it easy for others to copy it and take on the market;
- Unfavorable regulatory activities and macroeconomic trends can hamper the launch of products and turn them into low investment business ideas. Financial services are among the most dynamic industries in terms of regulations, so double-check the rules and guidelines before the meeting.
- Lack of teamwork and internal alignment is one of the causes that investors prefer to conceal. It’s a rather broad concept that may refer to an excessive number of co-founders (four and more), an existence of both a President and CEO meaning that they cannot allocate responsibilities wisely, a possessive business owner who doesn’t interact with the rest of the team, and tension within the management team that seems unnatural;
- If a startup comprises only business or technical people, investors may consider it incomplete and risky. For instance, we often meet fully-technical teams that find it challenging to craft business plans, elaborate marketing strategies, prepare business proposals for investors, pitch ideas, and too often they get rejected due to that;
- Other concerns mainly refer to the founders' involvement in the process, as we’ve already mentioned above. The principle is simple since if you don’t invest in your project, then no one will. Focus, mission, open communication — this is what angel investors look for when investing in entrepreneurs.
In one of the previous chapters, we’ve explained how to attract potential investors and emphasized the fact that thorough preparation is critical. In this section, nearly all the causes refer to poor prearrangement. So, let’s start:
- A well-structured and transparent capitalization table is crucial, especially if investors give serious thought to your project. Ambiguous cap table may include out-dated figures, defective models, miscalculated option grants, or lack information about the latest funding rounds, advisors having equity, workers on a vesting schedule, and other;
- Inferior presentation materials and mistakes may create the impression that you take your responsibilities lightly and will be even more negligent down the road, so investors may consider your startup insufficient;
- Sending out cold pitches is a bad idea that can make a wrong impression and result in a refusal. Look for common acquaintances and ask them to introduce you to the investors or at least write a short personalized intro. If no, then work on your letters, make them brief and informative, share slides if there are any, and ask for a short meeting or call.
This list can go on and on since there are other scenarios associated with business models, go-to-market strategies, licensing issues, and supply chain concerns. Some investors focus on specific geographies, and it’s important to check their portfolios before reaching out.
A Go-To Strategy on How to Find Investors to Start a Business
We’ve put under a microscope the entire process of how does investing in a business work, and reviewed each element separately. Unfortunately, getting caught up in the thrill of setting up a business, it’s too easy to overlook critical factors and place the whole initiative under threat. To prevent that, we’ve prepared a checklist to help you make the most of your small business investment opportunities:
- Be financially literate. Looking for investors for business, entrepreneurs often visit additional courses, read books, or attract advisors to be more financially competent. If you have a wise and healthy money mindset, and you make smart financial decisions in your daily life, then investors may be convinced that you’ll treat their capital appropriately and thus invest in your idea.
- Be ready to tell your story. How to sell a business idea to investors? — Think about your meetings with investors as job interviews and don’t revolve around the reasons why you need funding. Talk about your journey, how you’ve come to this point, and how your story will evolve.
- Recognize investors within your industry/location/niche. This item requires in-depth research, but it may save you time down the road. Start with finding investors for small businesses within your geographical reach and check their portfolios and industry focus. Such an approach can ensure more personal meetings and fruitful contacts. Developing working relationships with investors, you get access to other businesspeople who can become your source for highly professional hires in the future.
- Create a prototype. Most people are visuals, and we remember and acquire visual information better and faster. Moreover, having a prototype of product images will make your startup look mature. If you can collect user testing results, they will help you demonstrate the value, demand, and a better probability of return for investors.
- Introduce your team. How to find investors for a small business? — Build a robust and diversified team with a proven track record. As we’ve already mentioned, VCs invest in people. This is one of the critical factors that is taken into account while making a decision.
- Be persistent. Finding investors for business may take time, and not every pitch will be successful. Be patient, get in touch with other investors, and don’t forget to check out other funding sources.
Unfortunately, there’s no universal receipt or formula on how to find investors for startups, and even if you find one, it doesn’t mean that it’ll work for your niche or product. Working with startups and mature companies, we know what it takes to not only kick-off but also to stay afloat. Dashdevs has also evolved from a 10-people team into a seven-story office with 150+ top-notch employees in less than six years. Moreover, we continue growing despite fierce competition.
If you have any questions on how to find business investors or design an impressive prototype, our team is here to help you.