Investors play a huge part in helping new businesses start, grow, and innovate. They may offer capital in exchange for equity—a share of your company—or a loan you’ll pay back after some time with interest.
But with the right investors, the benefits go beyond money. They can share their valuable skills, experience, and connections to help you scale up. They also validate your business idea and growth potential, increasing customer and employee trust. However, many entrepreneurs struggle with how to find investors for small businesses, especially in the early stages.
At Remitly, we understand the difficulties founders, especially immigrants, face when trying to secure funding. Read this guide to know what to do and the steps to take to make your business investor-worthy.
Key steps before searching for investors
Finding an investor is hard enough. But being well-prepared for the engagement ensures you won’t waste the chance when you get it. The best way to do so is by defining how much funding you’ll need early on. More importantly, you must understand what you’re willing to give up or negotiate in order to start or grow your business.
Defining your funding needs
So, how do you quantify your funding needs? As business owners, here are a few things to consider:
- Total startup costs, such as website development, business incorporation, and licensing fees. Remember to include recurring overheads like office rent, salaries, and utilities. Adding these up will help you determine how much you need from an investor.
- How much of your own money are you prepared to invest in the business?
- Terms and conditions to engage an investor.
- How much equity you’re willing to give up, and if that’s an option.
- If you’re combining a loan, which is debt, and investor funds.
- The type of investor you’ll need to work with.
Determining the type of investor you need
The type of investor you settle on depends on your personal needs and those of your business.
- Business stage: Are you at the business plan, startup, or scaling stage? Some investors have preferences, so it’s best to determine if your preferred choice works with small businesses at your level.
- Business model: How will your venture make money? Investors analyze and seek to understand a company’s business model to gauge its profitability and growth potential.
- Capital drawdown period: How long does the investor take to release the agreed-upon capital? Venture capital firms, for instance, can take up to five months to disburse the promised funds, and it’s not always the total committed amount at first. So, assess your needs to decide if the wait period is within an acceptable timeline.
- Partnership terms: How involved do you want the investor to be? Be clear on whether you want a hands-on investor or a silent partner, and go for backers who fit the profile.
- Industry focus: Some investors specialize in an industry or sector they understand best, while others are generalists. This means they invest in businesses in any industry as long as the numbers make sense.
- Track record and reputation: Draft your terms and conditions, then review the potential investor’s track record and reputation to establish if they align with your needs and values.
- Your exit strategy: How do you plan to leave the business? Defining your preferred transition plan will ensure a smooth, profitable exit. But it will also influence your choice of investor, as different exit strategies appeal to different types of investors’ risk tolerance and desired ROI.
Understanding the investor’s perspective
Try to understand investors’ perspectives before taking the next step. This is a mutually beneficial relationship, so finding out how to meet each other’s needs will work in both your interests. Make sure you know the following important information about any investor:
- What makes them unique?
- Their investment criteria.
- How big do they expect the market to be?
- Their feeling toward making additional investments if needed.
- Their policy on fund allocation.
- Their most successful investments and lessons learned, both positive and negative.
- Opportunity to buy back equity.
Types of investors
Business investors can be categorized by their investment style, appetite for risk, and the type of assets they invest in. Generally, they fall under these distinct types:
Venture capitalists
Venture capitalists (VCs) are large financial firms that allocate part of their budget to funding startups.
This type of investor gives you the capital to launch your business in exchange for equity. They also contribute technical and managerial experience to ensure long-term growth.
Venture capital firms invest in early-stage companies, usually in the idea phase. Then, they nurture it for a while—up to ten years—before making their exit. This could be through business acquisition or selling off shares to the public via an Initial Public Offering (IPO).
Angel investors
An angel investor also funds a business in its early stages and asks for equity. However, this type of investor is typically an individual, and they leverage their own money to finance small businesses they believe in. In other cases, an angel investor could be a company or investment fund focusing on early-stage startups.
Because their personal funds are at stake, angel investors usually take a very hands-on approach. This means they actively participate in everyday business operations to protect their interests.
Crowdfunding sources
You could also list your business on a crowdfunding platform to raise money from a large group of investors. This method gives you a chance to maintain 100% equity, depending on the type of crowdfunding you choose.
- Donation-based crowdfunding lets people donate without expecting anything in return. It’s the best option for charitable causes.
- Reward-based crowdfunding offers investors advantages like early access to products and services before they launch.
- Equity-based options allow you to negotiate equity with groups of investors gained via online platforms.
- Subscription-based models allow investors to contribute regularly to help your business grow.
Pros and cons of equity financing
Venture capitalists, angel investors, and equity-based crowdfunders have one thing in common—they all want a piece of the pie. But how does sharing company ownership affect your business?
PROS
- No debt, allowing you to channel capital into growth and scaling.
- Improves creditworthiness, which defines how much lenders find your business a good candidate for loans.
- Professional management from business and finance experts with years of experience.
- Opportunity to learn from the best for free. Venture capitalists and angel investors have a wealth of information you and the team can tap into at no cost.
- Increased chance of large profit margins and faster growth.
- You share risks and potential losses.
CONS
- You share the profit according to the ownership percentage.
- You could lose control of the company if an individual or institutional investor owns a higher percentage of equity than you do.
- Possible conflict, especially when dealing with hands-on investors who want to run things differently.
Other funding options for small businesses
Besides these traditional routes, you can also consider alternative financing options for your small business:
- Access US government-backed small business loans and grants via the Small Business Administration (SBA).
- You could also get loans and grants through the Minority Business Development Agency (MBDA).
- Business funding from asking family and friends.
- Apply for bank loans.
- Business loans tailored for Immigrants through incubators and initiatives like New American Lending (NAL).
- Business credit cards. Limits can be up to $100,000 USD.
How to prepare your business to be investor-ready
You’ve narrowed down your funding priorities, required investment capital, and preferred investor type. Now, you just need to get your small business ready to attract investors. How can you accomplish this?
- Craft a compelling business plan with a clear growth path. For instance, do you intend to be acquired, add new products and services, or expand into new markets locally and internationally?
- Understand the unique role your business plays in the market, and use this to define a clear value proposition.
- An attractive future projection is welcome, but investors love to see current financial statements if your business is already operational. So, prepare a thorough financial report detailing profit and loss, cash flow, projected sales, and expenses to determine the business’s stability and areas to focus on.
- Highlight your business strategy and sustainability objectives instead of just products or services. Investors love startups that can scale, optimizing growth by using innovations to bump up profits.
- Issues like taxes, labor laws, and cybersecurity can be overwhelming. Do a SWOT analysis to find out what you don’t know, and share these weaknesses to open honest and transparent conversations with investors.
- Build a strong management team and do an audit to identify missing skills. Settling on an investor who fills these gaps will prove beneficial, as they bring more value than just money.
- Understand equity financing to decide how many shares you’re willing to give up and how it will affect your control over the business.
Approaching and pitching to investors
The next step is networking and pitching to potential investors. Here are some tips for success.
Attend pitching events
Small businesses in the US have numerous opportunities to pitch ideas to investors via pitching events and contests. These include:
- National Small Business Pitch Competition by SCORE
- Pitching and networking events hosted by the SBA
- Startup Grind community events
- SXSW Pitch festivals and forums
- Startup World Cup competition
- Angel Investment Network online pitches
Craft an effective pitch
Prepare a compelling pitch to attract investors and win money. Some contests, like the Startup World Cup, have lucrative prizes reaching $1 million USD.
An effective pitch solves a specific problem, inspires action, and shows knowledge about a particular industry. It’s also clear and relatable to the audience in some meaningful way.
To drive your points home during the pitch, be passionate, specific, and easy to understand. Focus on proving that your business idea has a competitive advantage to stand out in the current market. Also, be authentic to build a rapport with potential investors and draw them in.
Be open to asking and receiving questions
Master these skills to make the question-and-answer session after your pitch more informative and insightful:
- Communicate with clarity.
- Think critically.
- Pay attention to detail.
- Know the industry in depth.
- Be decisive and respectfully walk away from unfavorable deals and offers.
- Embrace curiosity.
- Negotiate based on facts.
- Show leadership but embrace teamwork by being firm while listening to contradictory opinions.
Finding an investor can be simple
Are you ready to go after the American Dream? If you want to attract investors and make your business a reality, lay the groundwork and create a good pitch, practice your presentation, network, and master critical negotiation skills to get the best deal.
FAQ
Can an LLC get investors?
Yes, it can. Investor financing is available for all business structures, including sole proprietorships, Limited Liability Companies (LLCs), partnerships, and corporations.
How do startups pay investors?
Financiers typically get a return on their investments through equity, trading capital to get a share of the company and its profits.
How can I find an investor for my small business?
To find the right investors, define your funding needs, determine the best investor type for your business, create a list of possible funders, understand their unique perspectives, and then settle on an option that meets your needs.
How do I approach an investor for funding?
To be well-prepared when seeking funding, do your research to create a list of potential investors, craft a compelling pitch, attend pitching events, and practice the skills required for a successful presentation.
What is a fair percentage for an investor?
There’s no blanket answer to this query. Understand equity financing, determine the investor’s input, and then negotiate a fair percentage. However, the general rate is 20-25%, depending on your negotiation skills.
What are the three types of investors?
Investors can be categorized by their investment style, appetite for risk, and the type of assets they invest in. Generally, the three types of investors include venture capitalists, angel investors, and crowdfunding sources.