Understanding the basics of raising capital is crucial to your business’s success. Before you get into which sources of capital to tap, you need to be clear on your business strategy. Draw up how you plan to get your business from point A to point B using the funding you’re trying to secure. Read on to find out how to find investors by following these seven steps to raising capital.
Step 1. Prepare Yourself by Doing Research
Preparation and doing your research is a critical step that all entrepreneurs looking for capital should do first. Putting in the time for research sets your venture up for more success than if you were to rush the process. You don’t want to commit yourself to the wrong form of funding for your company, which could force you to continually inject your own resources into your business to keep it going.
You need to assess several aspects of your business in preparation for seeking capital. Examine your employees’ overall efficiency and well-being, as well as research the industry your business is in, your competitors and the market. By this point, you should also define your products, prepare financial statements and projections, including how much money you need to raise, and decide whether to utilize debt or equity for funding.
Typically, this initial preparation should be the most time-consuming and intensive steps when trying to raise capital. Putting in the thorough work now can save a lot of headaches down the road. Plus, as you seek out and meet with investors, if they’re serious, they’ll ask you tough questions and you’ll need to be on point with your answers in order to convince them of you and your company’s viability.
Step 2. Learn About Different Types of Investors
There is no one, single type of investor for small businesses and startups. Among the different types of investors out there that you may consider include venture capitalists, angel investors, friends and family, business incubators and accelerators, investment groups and crowdfunding websites. Depending on your company’s business needs and goals, certain types of investors will make more sense than others.
Not only are there various types of investors. There are a variety of forms of funding as well. In order to access capital for your business, you can try funding by using personal and business credit cards, lines of credit, bank loans and more. Bear in mind these funding options are more contingent on the condition of your personal finances and assets, whereas raising capital from investors is more based on the value or potential value of your business.
Step 3. Network
As an entrepreneur, networking is absolutely necessary to find and lock down the best types of investors and funding for your business. Networking is not just about constantly promoting your business. Instead, you should approach networking as a two-way street, a quid pro quo. While using your network to promote your business, you should make sure to help those same people reach their objectives and goals as well. Maybe you can connect a fellow entrepreneur with a talented former employee of yours or perhaps a potential business partner. In turn, you could get help with identifying investors and securing capital. It’s much easier to raise capital when you’ve built up a positive reputation for your business, especially if you’re known for helping out other entrepreneurs and business owners.
There are various ways to go about networking when you’re seeking capital for your business. Nowadays, social media networking is very prevalent and can be a great way to find investors. LinkedIn is an excellent platform for networking and identifying potential investors. Another great website for startups to network and raise capital is through Gust, which can handle everything from incorporating your business to exiting it.
For some in-person networking, startup events and conventions can be an ideal spot to find investors. Events like the Consumer Electronics Show, Startup Grind, SXSW and Seedstars Summit, among others, can be an arena for you to pitch your business to various people and companies. But they’re also excellent venues for scoping out competitors, getting insight into your industry and market, studying and developing potential customers and more.
Step 4. Connect with Angel Investors
In general, angel investors are independently wealthy individuals, often entrepreneurs who have exited a successful business and are looking for new and innovative businesses to invest in. Since they are wealthy and risk-takers themselves, angel investors tend to look for investments with a greater return on capital than traditional investment channels, while taking on more risk in the process. Angel investors offer capital to entrepreneurs through equity financing or convertible debt.
In recent years, angel investors have become more institutionalized and accessible. Nowadays, finding angel investors can be done without personally knowing or being connected to them. There are countless ways to connect with angel investors right online. One popular platform is Angel Investment Network, which allows you to find angel investors in the U.S. and worldwide. There’s also AngelList, which drills down to the local city level offering potential angel investors for your business.
Step 5. Seek Out Venture Capital
Venture capitalists, also called VCs, generally want to invest in companies that are a bit more mature than angel investors typically invest in. Venture capitalists may also want to have more of a say in managing day-to-day operations. This is because venture capitalists have a responsibility to obtain certain returns for their firm or fund. Thus, venture capitalists want scalable businesses with positive cash flow and proven products or services.
A big part of successfully securing funds from venture capitalists is to have a clear and very concise pitch prepared for your business. You should be able to describe your business in a sentence or two, similar to a 30-second elevator pitch. Another good strategy is to type up a one-page pitch or produce a high-quality short video that gets all the key points about your business across quickly. This is a great way to follow up on your shorter elevator pitch if you’ve made one.
One of the easier ways to seek out venture capital funding is to use an online venture capital firm like MicroVentures. According to their site, the sweet spot in terms of funding amount are startups looking for $150,000 to $1,000,000 in capital.
Step 6. Check Out Crowdfunding
Crowdfunding is an increasingly popular method of raising capital, thanks to technology making it easier for you to connect with like-minded people who you may have not otherwise met. Crowdfunding allows you to do several things, such as gauging the interest in your product and learning what’s working and what’s not. You can use this to improve your product and pitch. And, of course, the most important function of crowdfunding is that it can help you raise capital to fund your business.
How do you start a successful crowdfunding campaign to raise capital for your business? There are plenty of websites these days that are designed precisely for crowdfunding. Here are some of the top choices used for crowdfunding startups.
- Kickstarter: This platform helps artists, musicians, filmmakers, designers and other creators connect with people to invest in their ideas and make them a reality. Funding on Kickstarter is an all-or-nothing affair, so you have to reach the funding goal you set within the allotted time or everyone gets their money back.
- Indiegogo: This platform offers both live crowdfunding campaigns and a marketplace for innovative products. With Indiegogo, there are no fundraising targets or deadlines, and you can apply equity, issue securities and offer revenue sharing.
- Crowd Supply: This crowdfunding platform is mainly for raising money to develop and produce hardware, such as microchips, electronics and similar technologies.
- Crowdfunder: This website allows you to connect with a community of 200,000 entrepreneurs and access capital from 15,000 accredited investors offering equity crowdfunding.
- Experiment: Dedicated to helping fund the next wave of scientific research, Experiment allows you to launch a science project through their platform. Experiment requires you define your project and funding target, get endorsements from colleagues and peers, submit your proposal for review before promoting your science project to the world.
These aren’t the only crowdfunding websites out there, but it’s a good start for any type of entrepreneur. Make sure you follow any rules and regulations on these crowdfunding sites, such as avoiding non-profit crowdfunding platforms if you’re starting a for-profit business.
Step 7. Investigate Accelerators and Incubators
You may have heard the terms startup accelerator or startup incubator. These organizations and programs should not be used interchangeably as they are technically different. Both incubators and accelerators, however, can help your business track down investors.
The first area of distinction is in their purpose. Incubators help and support startups that are in the beginning stages of building their company. Typically, a startup will have an idea to bring to the marketplace, but no proven business model or method of translating their innovative idea into a reality. Accelerators, on the other hand, help support the growth of existing companies with an idea and business model in place. Accelerator programs build up existing startups and connect them with investors and influencers.
Another key area of difference is in terms of investment capital. In general, incubators do not usually provide capital to startups and tend to be funded by universities or economic development organizations. In contrast, startup accelerators do invest a certain amount of capital in startups in exchange for a prearranged percentage of equity. Thus, for you as an entrepreneur looking for investors, accelerators likely make the most sense. However, incubators do provide invaluable support and services despite usually not being a source of capital. That’s why investigating both incubators and accelerators can help you and your company.
The Bottom Line
The key point to all these steps is to line your startup up for success by identifying as many financing options for your business as possible. Being able to find investors and raise capital is naturally the goal of all these steps, but the very first step should be an internal, self-evaluation of your company. Before you can start finding investors, you need to fully understand your business, your team and your objectives in terms of funding and how your business will use it. This preparatory work is essential to matching your company with the right investors and the right form of funding. Don’t get discouraged if one investor doesn’t work out. Be persistent and thorough in your search for investors, and ideally soon enough you will lock them down and raise capital for your business. And if not, there are always plenty of other ways to fund your business.