How To Find the Right Investor for your Business
As a business owner, securing funding is often key to the successful running of your company. Whether you're starting out, expanding, or need to temporarily cover cash flow, getting investment can bridge the gap between having an idea and making it a reality.
But how do you secure the right type of investor for your business when you don’t know where to start?
In our guide, we explain everything you need to know about finding the perfect investor, including what they are, where to find an investor and how to attract the right one for your small business.
If you’re wondering what makes a small business, you can read our simple guide to see where your firm fits in.
What is an investor?
An investor is simply an individual or a company that puts money into your business with the aim of making a profit. They can also invest in exchange for part ownership of the business, but this may come with restrictions.
As partial owners of the company, your investor may request that you change certain aspects of the business or run certain decisions by them. They might ask to be consulted about any changes to your business strategy or want final approval on transactions over a certain amount.
What to look for in an investor
When you’re looking to find an investor, there are several factors you need to consider:
- Experience in your industry — When it comes to finding an investor, you’ll want to make sure that they have experience within your industry. Having detailed knowledge, knowing the best practices and how to apply them are key aspects you need to consider. It’s extremely valuable to have an investor who can not only advise but also teach you and ask you the tough questions others won’t.
- They trust in your vision — As the founder of your business, you need someone to advise and navigate through unfamiliar situations. Find an investor who understands the vision you have and will help to make the right decisions along the way.
- Valuable network — Knowing the right people can offer up new opportunities for your business that otherwise may not have been available. An investor should have a list of connections that can help move your business forward.
- They fit your culture and brand — When you pick an investor, it’s more than likely that they will have a say in making decisions that are related to your brand. Choose an investor that would be a great fit for your brand and would seamlessly integrate into the work culture.
- Can they commit? — While it’s good to see that your potential investor has a string of successful investments behind them, you have to consider ‘can they make time for my business?’ If an investor will bring money but little else, it might be worth considering looking for someone else who will put in the time and effort.
What do investors look for in a business?
The first thing an investor will look for is the potential to make a return on their investment. The amount they want to make and the number of years they're prepared to wait for this return will depend upon your business and the opportunity it presents.
These are the things an investor will typically want to know about your business:
- Exactly what it does and who its target market is
- A realistic value of your business, including assets, liabilities, and equity
- Financial records, including how much pay yourself as a business owner
- Evidence that you know what they can offer as an investor
They'll also want to have a clear exit strategy. It may seem strange to talk about how they'll leave the business before they've even invested, but this will give them peace of mind that there is a plan in place beyond the growth they can help provide. Think about answering the following questions:
- Who are the likely buyers?
- When will their investment mature?
- What strategy will get them to the point of profitable investment?
What types of investors are there?
There are many different types of investors, all with different USPs and things to consider. Here are some of the different types of investors you might encounter on your journey towards business success.
A venture capitalist (VC) will look for a business that has the potential for a lot of growth. They’re usually private investors who use their own money to help fund businesses and often aren’t associated with a group. Many VCs seek to make an agreement that will either require equity or a board role within the company, but this isn’t always the case; others may only want to collect interest or another form of a payout instead.
A venture capitalist can also come in the form of a venture capitalist firm. Their investment capital are often obtained from pension funds, insurance companies and wealthy investors. A firm is less likely to want ownership or equity of your business, but it will usually attach an interest rate to the money that you borrow to see a profit.
Spotify, Dropbox and Facebook are all examples of companies that have received venture capitalist funding.
Angel investors are different to most other forms of investors in that they specifically invest their own money in new startups that have yet to establish themselves. To find opportunities, angel investors will network across different platforms like Angel Investment Network to seek out companies that require a financial investment.
Unlike other investors who focus on profits, angel investors know that companies have the potential to fail and that they’re putting their money on the line — so they’re even more determined to see the company succeed.
Business incubators are designed to help start-up companies, early-stage businesses, or even just a business idea grow. They’ll offer support and resources — like access to networks, mentors and investors— to young companies who would struggle to find these things alone.
Incubators often provide support with:
- Finding a co-working space — If your business is benefiting from a physical incubator (which is essentially just having someone physically present), they’ll often provide a space for small businesses to work alongside each other to learn from one another.
- Potential investors — Incubators will usually make seed funding available and can expose your business to potential investors.
- Networking — Incubators will often show support by networking your business for you. They’ll share ideas with other investors and entrepreneurs within their network, surrounding your business.
- Workshops — They’ll often put on workshops so companies can gain access to experienced advisers and mentors, which is a great opportunity to learn.
Not all incubators will provide funding - in fact, this is usually quite rare.
Accelerator programs support early-stage and start-ups businesses through short-term mentoring, training, and investments. Depending on the structure and objective of the business, accelerators may be funded by venture capital investors, public bodies or large corporations — they can even be companies or colleges.
Along with offering money to help the business, they may also offer:
- Training and mentoring
- Intense and time-limited support
- Access to experts in the field
- Any additional resources
Crowdfunding is a way of raising money to finance your business and its projects. Instead of offering interest or ownership, crowdfunding typically involves delivering an early-access version of the product or service you’re selling in exchange for funding from the general public.
There are two main types of crowdfunding:
- Donation-based — Where individuals will donate a small amount of money to fund a larger aim. This is typically a charitable project which means the donator will receive no financial or material in return.
- Reward-based — An individual will donate to a business or project with the promise of receiving in return a non-financial reward. They’ll usually receive the goods or services at a later stage in development in exchange for their contribution to the project.
It’s also a great way to cultivate a community around your business or product, meaning you already have the backing online.
This is when an investor provides a business with capital in exchange for a share in the business. This cash can be used for anything from growth and expansion to cash flow or cutting debt. This type of investment in small business can bring huge gains but it also comes with the biggest risk, so be prepared for the investor to want a hefty share of your business when investing.
Where do you find investors?
Now you know what types of investors there are, your next step is where to find them. Any small business looking to attract investments will have to fight for it, so it’s important to consider that you could find investors in:
Friends and family
Considering asking your friends and family to invest or provide a business loan may be one of the easiest ways to raise money. Typically, a loan may be easier for both yourself and the other party as this means that you’ll pay it back over time with interest — meaning they’ll get their money back no matter what the circumstances.
An investment, however, means that your friend or family member would hold a stake in the company and, unlike a loan, you might be able to get more money upfront. Your investor will only get money if your business becomes profitable.
That isn’t to say investment from friends and family doesn’t come with its challenges. If the business fails and their money is lost, this could put a permanent strain on your relationship.
If you’re already working in your given business sector, the chances are high that you’ll know people who are in a similar line of work or role to yours.
Connecting with them on professional networks like Linkedin or even asking to meet in person may help in trying to find an investor. This is because they may be able to offer recommendations on who may be interested in your company or express interest themselves.
An investment platform can be a good way to find investors and showcase what you have to offer. They can also be known as a fund supermarket, but they both offer a single place to search and invest in shares and funds.
It’s important that you put together an investment portfolio so you can directly show potential investors what your business or product is and what it has to offer.
How to attract the right investor
Before you find an investor, you need to make sure that your business ticks all the right boxes. To increase your chances of attracting the right investor, you’ll need to make sure that you:
1. Have a clear business plan
Investors want to avoid bad investments. Drawing out a clear business plan can be a great way to showcase to potential investors you’re serious about the growth of the company.
In your business plan, you should outline any business owners and their roles within the company, your financial goals for the year and within the next five years and your business model.
If you’re not sure how to make a business plan, you can instead hire a business planning company that can offer a more in-depth look into your business and how it should be proceeding. They’ll also be able to assist you in writing a pitch deck, which contains information about your company and help present it in a way that will entice potential investors.
2. Keep your finances tidy
Having your business finances in order can be a great way to show potential investors that you know how to run your business. Keeping your finances in order and readily available allows investors to see a clearer picture of your company, after all, they are risking their money by investing in your business.
Your potential investor is going to want to see your business's financial statements, sales, margins and cash flow.
3. Be honest about your vision
Choosing an investor that has a similar vision for your business is one of the most rewarding and important factors that you’ll need to consider.
That’s why it’s essential you resist the urge to make your vision sound like something you think investors will want to hear. Doing so means you could put off investors who actually have a similar outlook to yours, or worse, you’ll pick up an investor who will eventually feel misled or who will steer your business away from your original plan.
Investors vs business loans
A business loan differs from that of an investor in the sense that you won’t be required to give up equity within your company. You’ll also have to consider the risk versus the return — if you use a £400,000 loan and turn it into £1m in profit, that profit is all yours, but if you make a loss and your business goes bust, the loan must still be repaid.
When it comes to choosing between an investor or a business loan, there are certain pros and cons that you’ll have to consider.
- More control — Since they’re standardised, small business loans aren’t nearly as varied in price compared to a private investor.
- Straightforward application — In terms of paperwork and liability issues, obtaining a business loan is usually more straightforward.
- Flexibility — The loan date is flexible and the terms can be set to match your needs.
- No lasting impact — A small business loan won’t have a lasting impact on your company after you’ve repaid the loan — you can even be considered for a business loan if you’ve got bad credit.
- No claim — Lenders don’t have any claim in the business, unlike investors.
- Larger loans can be hard to obtain — For small or early-stage businesses, large loans can be difficult to acquire. The loans that are available to you will typically have higher interest rates or smaller amounts.
- May require collateral — You may have to put up collateral which the bank can take If you fail to make or miss any payments. If you’re required to sign a personal guarantee with your business loan, this means that the bank can come after your personal assets.
- Loans have to be repaid — Regardless of whatever financial situation the business is in, you have to repay the loan.
- Affordable funding option — Raising money through investors is usually a quicker and easier process than securing and taking out a loan. You can structure your deal with an investor so they only start getting a share of the profits once your business has become profitable.
- Fewer legal risks — While it’s still important to write up a proper contract when you agree to a deal with an investor, they generally can’t take you to court as easily as a bank can for late repayments.
- Industry insight — You gain insight from your investor who will have industry knowledge, experience and contacts.
- Less complicated application process — Finding an investor for your business can be easier because there isn’t a need for such extensive background checks as opposed to a bank.
- Difficult to negotiate terms — Because investors don’t necessarily require collateral as a bank loan does, you’re in a weaker position to negotiate terms with them.
- Loss of control — While it can be a good thing to have the input of your investor when making business decisions, this can sometimes cause problems. Seeing as investors can acquire a large equity share in the company, you’re ultimately going to lose full control over the business.
Regardless of whether you opt for a private investor or a loan from the bank, you’ll still be acquiring the steps you need to move forward in your business.
Why an investor can be good for your business
Starting your business can be an exciting time, but having that financial push can be a massive boost. Whoever you choose as your investor can be a make or break decision, so it’s important to remember that this is a person you’re going to be sharing your business with.
Get in touch with the Bionic team to discuss your needs or get more information on business finance today.