How to get Investors for your startup
Investors can be valuable for any company, including startups. If you find the right one, you can gain expertise, a better network, financial help, and everything else your business needs. However, getting the right investors for startups can be difficult journey.
So, how do I get investors for my startup idea? How do I approach investors with a good business pitch? We will answer all these questions within this article – so stay tuned!
What Is a Startup Investor?
They usually acts as a business kickstarter. This is different from fundraising (like crowdfunding) or issuing stocks, which is a separate kind of investment for most companies.
Investors come in many forms, from banks and family members to angel investors and venture capitalists. If you are looking for support and a functional network, reaching out to accelerators or applying for a small business administration loan can also be an option to kickstart your business idea.
Why Do Startups Want Startup Investors?
Starting up a new business often takes a lot of money. The actual prices vary by industry. Restaurants can cost up to $750,000 to start, while tech companies could spend tens of millions of dollars before they finally get into the black.
However, the people with an innovative idea for a business aren’t always the ones with enough own money to make it happen. Furthermore, without the right expertise and know-how, it can be hard to launch a company properly and have it last long enough to reach independent success or at least get bought out by another business.
Investors can provide this money, allowing a business to operate without worrying about its finances. Done correctly, this allows a company to exploit its growth potential and proving its business model.
What Are the Types of Startup Investors?
Here are the most common types of investors and funding options:
- Angel Investors: Angel investors are individuals (or groups) who usually try to support projects they are passionate about, especially for new companies that have difficulty getting other sorts of financing. Angel investors can support high-risk projects and usually get a high return if their investment succeeds.
- Banks: Banks are a traditional source for startup investments. Bank loans provide many options and can be tailored to specific business plans if necessary, but loans also have strict repayment requirements. Bank loans also tend to require collateral.
- Peer-to-Peer: Peer-to-peer lending focuses on linking business owners and entrepreneurs together. This format can be particularly effective for startups that serve multiple businesses in a relatively small urban area.
- Personal Loans: Personal loans come from individuals outside the typical lending circles. In most cases, these are family and friends willing to pool money to support a cause. Although they’re not part of the primary lending circles, they invest more than any other group and may be willing to wait longer for repayment.
- Venture Capitalists: Venture capitalists (VCs) offer the largest amounts for businesses but take partial ownership of the company as compensation. They also tend to acquire management positions but can bring personal expertise to help a business succeed. VCs have the strictest standards of all loan types.
Where Do You Find Startup Investors?
There are many ways to find potential investors and raise money, including online and offline methods. Online platforms like Start Engine, Investor Hunt, and First Round aim to provide a simple online solution for getting investors together. Remember, these websites are serious, so it’s crucial to come in with a rock-solid business plan.
Family and Friends
Getting investments from family and friends can be much easier, especially if you get smaller amounts from multiple people. By pooling resources together, it’s often possible to get enough funds to open your doors and get started.
This route can take the form of loans or proper investments. Loans are entirely transactional, with the expectation that you’ll repay what you borrowed once you become profitable. On the other hand, investments could give friends and family partial ownership of the company.
Finding family and friends can be risky on a personal level, though. You could ruin your relationships if things don’t work out, so think twice before you try this route.
Angel investors are can be often found online, though you might be able to connect with them in person if you attend the correct events. Many angel investors are looking for companies in a pre-seed stage that are just launching, as they prefer to get in on the ground floor at an early-stage. They may no longer be interested if you’ve been operating for a while.
The reason angel investors like to get in early is that they prefer having a voice in operations so they can run it more the way they want. They usually don’t have total control, but they do have an influence on things. That’s not necessarily bad if they know what they’re doing, but it’s good to keep in mind.
Venture capitalists, like angel investors, can be found online and offline. Many participate in programs designed to help find and sort ideas. Venture capital firms often see more requests than anyone else, reaching as many as a hundred offers for each one they invest in. For comparison, angel investors put money into one of every ten offers.
The main difference between angel investors and venture capitalists is that VCs focus on businesses that are already operating and are trying to grow or move into a riskier area.
Venture capitalists usually focus on high-risk opportunities, especially those with the chance for large growth. Recently, much of this funding has focused on tech startups, but some venture capitalists are willing to look into other areas.
What do investors consider?
There are many kinds of investors on the market, but not all of them will fit your needs. Here are some of the things investors consider when supporting a startup business.
Return on Investment
How much money are you likely to generate? A startup investor may only look for businesses with a potentially huge margin for growth. If your company is predictable but has a relatively low ROI, they may ignore you. However, other investors may want a safer bet.
What does your business do? Business loans at startups are available for companies across the economy, though tech startups tend to get most of the attention. Larger and more institutional investors tend to focus on lower-risk business categories.
How much competition does your concept have? You’re not going to have much luck finding investors if you want to create the next Google, as their domination of internet searching isn’t going to be shaken anytime soon. However, if you can get a contract to be the only company delivering specialty supplies, you may have no competition.
How much money do you need to kickstart and operate your business until you’re fully profitable? Wealthier investors can put more money in and wait longer for you to succeed, if necessary. Naturally, investors prefer putting in as little as possible, but those with the means can also provide additional investments if necessary.
Startup funding usually takes expected needs into account. Some investors will only provide money in stages to help ensure things stay on track.
Your company may have unique needs or challenges. Some investors are more willing to support these than others. For example, some banks may be more familiar with odd business plans and be in a better spot to offer startup loans.
Prepare the Right Tactic for Your Business Pitch
Learning how to pitch a business idea is essential for your success. A good pitch usually follows the pitch deck format, which is a series of slides that both tell a story and provide hard facts and information. These are ten components of a good pitch:
- Introduction: The introduction should briefly explain your business and why you want to operate it. Make sure to include a unique value proposition, comparing your business idea to an existing company and showing how your idea is different enough to be worth caring about.
- Problem: The problem component showcases the specific problem that customers are having. This is a good spot for storytelling because it can showcase a real need your product or service is made to meet. Make sure it’s a real problem that people have, not something you’re assuming they have.
- Target Market: The target market is who you want to sell to. Knowing how many customers you can realistically reach is a critical part of your pitch. This can also show your potential revenue if you’ve done enough research.
- Solution: The solution section explains how you’re going to solve the target market’s problem. Like the problem section, this works best if you do it narratively, with stories of how you’ve tested the idea and specifically improved the lives of customers. Photos and videos of the product in use are a good tactic here.
- Traction: The traction section showcases your company’s growth through metrics like profit margins, annual revenue, or the number of users. Its main purpose is to convince investors that you are a low-risk proposition. If you don’t have your own traction, you can discuss the performance of similar companies.
- Marketing Plans: Your marketing plans show how you plan to advertise to customers. Ideally, this will include strategies to narrow in on the target market. For example, if you sell medical supplies, you might have staff inside hospitals who can provide the products and guide surgeons in using them.
- Competition: A strong competitive analysis shows how many other businesses you’re competing against and how you differ from them. Using a problem-solution format, where you admit challenges and showcase clear plans to deal with them, is effective in highly competitive environments.
- Team: The team section of a pitch showcases who’s on your team, and especially how much experience they have. Generally, the more experience your team has, the better. You can also tie this to specific investors. If you need help marketing, you can present to investors with expertise there and say why they’re the best match for you.
- Financials: Investors want to see information on your company’s finances, preferably for at least five years. If your company is brand-new, showing your income or results from previous businesses you’ve started can be an acceptable alternative.
- Investing Goal: Finally, you need to explain exactly how much money you need and how you intend to spend it. This showcases that you have realistic expectations for costs and budgeting.
Also, outside of the pitch, consider taking a class in public speaking.
How To Build Your Network and Approach Investors
Before tackling your investor pitch, you need to build your network and find people who might be willing to invest. You can start at low-impact events where you can meet people and get feedback, then contact people individually once you’re completely confident in your presentation.
Try to get listed on startup platforms. Start with people you know, and ask if they know anyone that might be interested. Collect names, then do research into them to see if they qualify. Consider getting multiple sources of funding, like personal and bank loans or crowdfunding instead of relying on one strategy.
If possible, try to build a network while you’re in a high position in a reputable company – this will let them know you understand what it’s like to be at the top of a company. Social media channels like LinkedIn and Xing are your best friends here!
Consider to network with other startups together, too. If you work together with other early-stage brands, you can become clients for each other and strengthen the whole group. Investors often like seeing a full chain of support before they invest in startup companies.
Remember, you don’t want to appear greedy when you’re networking. Try to build genuine friendships with people early on and get them to like you. Don’t forget to connect on social media to stay in touch and transform your network to the next level.
If you do this correctly, you may even change someone from an angel investor into a personal investor. They’re still going to do their due diligence when studying your business plan, but if they know and like you, they may be willing to offer more money and a better compensation plan. Either way, make sure that you’re honest and respect their time.
Pros and Cons of Getting Startup Investors
There are many pros and cons to getting the sponsorships startup companies desire from investors. Here are some things to consider about that.
Pros of Startup Investors
Investments aren’t always loans. If you get a loan, you usually need to repay it whether your business succeeds or not. However, private investments push most of the risk onto the investor, so you’re not in as bad a position if things go south.
Investors can fund you regardless of credit history. Most investors aren’t too concerned with your past unless there are major red flags, like a history of fraud. Instead, they want to know how much money you can make them in the future. That makes them more reliable than loans.
Investors can share their expertise. This is particularly important. The more talented people you have available, the better. Investors may have a lot of industry and business-specific knowledge that can make all the difference between success and failure. Even better, investors may not need a salary. They expect to be repaid differently, so they may be working in a way that doesn’t diminish your funds the same way hiring someone else would.
Investors increase the odds of success. A lot of this comes from their expertise, but just having reliable funds may be all you need to succeed. Angel investors and venture capitalists in particular have a measurable benefit on the effectiveness of businesses. Some of this is probably because many investors focus on businesses likely to succeed. However, whether they are the cause or the effect, the fact is that companies with good investors statistically do better than those without.
Investors may be the only way. It’s one thing if you have the money to self-fund a new business, but most people don’t have that much money easily available. Investors can make otherwise-impossible business plans into realistic options.
Cons of Investors
Investing for startups has a lot of expectations, not all of which are favorable to you.
Investors set the bar high. They want a payoff, and they’ll push you to perform in a way that will help them get that payoff. You may have to work long and hard to meet their expectations, especially if they withhold additional funding until you meet certain milestones. The exact payoff rate varies, but a typical repayment is ten times their investment within five to seven years. Businesses don’t always grow at the same rate, though they may leverage their expertise to help you meet this goal.
Investors get a number of your profits. As a general rule, investors tend to demand more ownership of your company if they have to make a larger investment. This means that even if you’re extraordinarily successful, your profit could be half or less what you’d otherwise make. There may be times when you should avoid investors. The goal here is to avoid any situation where paying back the investor prevents you from making a profit. If possible, look to ensure a minimum profit for yourself in the contract. This frees you to focus on improving the company.
You’re going to lose some control. Investing comes with a lot of strings attached, and unless they know and trust you exceptionally well, no investor will hand over hundreds of thousands of dollars and then forget about you for half a decade. More realistically, your investors are going to take an active part in managing your company. They’ll have a big say in who you hire, how you market, what you prioritize, and how you structure the business. They may also push for personal returns at the expense of long-term company performance.In short, you must be comfortable giving up some control of your company to an investor.
Not all businesses fit investors. Investors like seeing predictable growth, preferably with solid profit margins. If you can’t earn enough money, then investors will often look elsewhere. This means that even a rock-solid business idea with near-guaranteed profits may not be enough to attract additional funding.
There’s a lot of competition. Many small and new businesses want to attract investors, so you’re competing against a lot of other people. Some of those people are unprepared to run a business the way an investor expects, but others are genuinely competitive with you and you need to be good enough to stand out.Dealing with the competition is a mix of great concepts, a solid team, and outstanding presentation skills.
Getting Startup Investors as a Student
It’s possible, though not always easy, to get investors when you’re still a student.
For example, Bill Gates famously dropped out of college to help found Microsoft, getting support from others to kick-start his ideas. However, he also had proven successes at college, including creating prize-winning traffic monitoring software and developing an algorithm to solve a complex problem. The algorithm held the speed record for more than 30 years.
Major colleges and universities are a great way to build a network and meet potential investors for your company. However, it’s important to have a clear idea of what you plan to do, and preferably a working prototype that you can expand on. It’s also best to finish college if you can, rather than dropping out.
How To Get Investors for Your Startup: Final Thoughts
There’s a lot to consider when it comes to finding investors for startup companies. From finding an investor with the funds, experience, and willingness to help create a solid business plan and recruiting a team to make things happen, there are so many variables that it can seem daunting to even try.
However, when you take a step back, you’ll see that finding investors for startup companies isn’t as complicated as it may seem at first. If you can create an outstanding business plan that clearly explains your costs, challenges, and route for success, most of the rest is just talking to people and presenting.