Starting a new business can be an exciting prospect for many new entrepreneurs. Developing your business from ideation into reality is one of the most rewarding parts of being an entrepreneur. Many new business owners decide to bootstrap their company at the start to save money in hopes of developing the business into a venture that needs funding in order to grow in the future.
Finding the right investor can make or break a business, so it’s crucial to know what to look for when deciding whether or not to take funding from an outside source. If you find yourself in the position to consider multiple investors, there are specific questions that you’ll want to ask them to make sure they are a good fit for your company. Continue reading to find out everything you need to know to find the right investor for your business and how to say no to investors that aren’t a good fit.
Before taking on an investment, the first attribute you should look at is the assets that the angel investor or venture capital firm has at its disposal. Since you’ve calculated how much capital you need for a seed investment, you need to ensure that the investor has sufficient funds to add value to your organization.
In addition, if your startup needs multiple rounds of funding down the line, you need to determine if the investor will be able to handle subsequent funding required to grow the business. Since 27% of companies surveyed by the NSBA in 2021 reported that they couldn’t acquire the funding they needed to grow their company, this is a crucial step in the process of qualifying investors. The inability to receive proper financing leads to stagnant sales growth and the possibility of laying off employees.
The next important factor to consider before taking an outside investment is the background and experience that the investors bring to the table. If you’re a software startup,you want to strongly consider working with investors who have experience in the space themselves or have worked with other similar startups in the past with successful exits in the software industry.
One of the best parts about working with angel investors is that they often bring their experience when they decide to invest in your business. Many angel investors choose to work with new entrepreneurs who may lack the skills and knowledge they have,which adds value to the company in addition to a monetary investment.
You may have heard the phrase, “Your network is your net worth,” and this couldn’t be more true in business. Knowing the right people in your industry opens up opportunities that may not be there if you didn’t work with well-connected investors. You’ll want to ensure that your prospective investor has a long list of industry contacts that they can tap into to build strategic partnerships, make introductions, and contribute to the growth of your company.
4. Screening investors
While you may be inclined to take the first offer you receive, it’s important to properly screen investors and perform your due diligence to ensure that they are a good fit for your company. Many different factors go into screening investors, but you’ll especially want to look at their industry experience and activity level with their investments in addition to several other factors.
5. Level of involvement
If you’re a new entrepreneur, you’ll want to seek investors actively involved in helping your business grow. Some investors choose to be silent partners in their investments, and you need to be clear about what you can expect in the involvement of your investors before deciding to take their investment.
6. Prior exits
Since you’ve already identified your exit strategy for your startup, you need to find an investor that will help you get there as quickly as possible. An investor with a track record of prior exits in companies similar to yours shows that they are competent and will likely be able to do the same for you and your startup.
7. Conflicts of interest
Finding out if an investor has any conflicts of interest is important for several reasons. If they are involved in other businesses within your sector, try to determine how these companies are performing. Under performing investments in companies in your industry could signal that they aren’t the right investor for your business.
8. Other Considerations
In addition to all the considerations you need to account for above, there are more things to consider when finding the right investor for your business. First, you must also consider the types of investors you have to choose from.
Angel investors are high net worth individuals who invest their own money and typically bring industry expertise and experience with them in addition to providing capital. Angel investment funding has been steadily increasing, and in 2020 the total angel investments totaled over $25 billion, an increase of 6% since 2019. Angel investors typically target early-stage companies that need an influx of capital to grow their operations in the beginning. In addition to the growth in funding, the number of angel investors is also increasing. There are currently over 334,000 active angel investors, and this number continues to grow each day.
Venture capital firms specialize in funding businesses that are rapidly expanding or have high-growth potential in the near future. Venture capital deals can average $7 million and are more common in industries like technology and the biomedical field.
Another great way to find the right investors for your business is to join an accelerator or startup incubator. These are designed to assist startups in growing by offering support, resources, and advice to early-stage companies that wouldn’t be able to grow independently. Incubators allow you to get in front of investors and often allow founders to acquire seed funding and grow their network.
With all the tools and resources available to entrepreneurs, knowing how to find the right investor for your business doesn’t have to be difficult. By examining all the factors we’ve highlighted, you’ll be able to assess whether or not any potential investors the right fit to help your company grow into a profitable enterprise with a successful exit.