It can be difficult for small business owners to obtain financing from large financial institutions. Therefore, working with private investors could be a smart move and sometimes the only solution. The positive note is that private investors are more interested in the growth opportunities provided by their investments and are willing to invest long term focusing on wealth creation and making profits. They have a different point of view from institutional investors.
In many ways, private investors have a similar vision to those who invest through crowdfunding with the difference that with crowdfunding many people will try to invest in businesses in exchange for some kind of advantage such as a discount on products or services. On the other hand, private investors will invest a lot more and will normally seek for some equity from the business itself. Sometimes private investors will want to sit on the board and actively play a role in running the company.
Common Types of Private Investors and Investment Options
Don't be discouraged if you don't get inundated with investment offers or if you get turned down. How to find private investors often means talking to dozens or even hundreds of them before finding the right one.
Friends and Family may be an Option
They may invest if they believe in you and are passionate about helping you, but this is not always the case. If you can get hold of this type of funding, be sure to keep your personal and professional relationships as separate as possible. You have to put everything in writing and clearly explain the risk associated with their investment and that they may even lose it.
In exchange for their funds, private equity investors receive the owner's equity in a firm. The goal of a private equity investor is to later sell their stake in the company to make a profit. Equity investments are for companies that already have a good amount of assets to leverage. The key to finding good equity investors is to have strong growth projections and a safe business plan. As investors take great risks, they must be shown great returns. Only when investors see a potential good profit do they take the risk of engaging in the business.
This type of investment is suitable for high-growth startups. Venture capitalists face greater risks in their investments as the investment has the potential for a high return and are involved in board decisions, marketing strategies and they closely monitor business. Venture capitalists invest more money than angels. Therefore, it becomes very important for founders to have an established business and proven business track.
Angel investors are typically wealthy individuals who seek startups as an investment, usually in exchange for a stake and often contribute with specialist knowledge to help the company achieve its goals. Angel investors are like venture capitalists, except they invest smaller amounts. Nevertheless, the U.S. Securities and Exchange Commission defines angel investors as accredited investors that reach a net worth of at least $1 million and earn $200,000 a year or $300,000 a year jointly with a spouse.
The lender grants the loan because he believes your business has the potential to grow. Sometimes friends, family members, venture capitalists or angel investors do this. With a loan, you have to pay back the money plus the interest.
Crowdfunding websites provide access to a wide variety of small business investors. This investment strategy uses collective efforts to finance a business. Since every crowdfunding site is different and differs in the way it incentivizes investors, they should be carefully researched to find the one that matches the firm's goals and strategies.
Social Networking Sites
LinkedIn still remains a good place to look for investors. However, there are many new social networking sites that can help connect with investors. On social networking sites you can of course find investors from other countries who wish to invest and often bring the product or service to their part of the world.
How to Find Private Investors
Investors first want to see growth potential, a well-organized plan and sound finances before investing. Hence, careful preparation is required to find a good private investor. Create a business plan that explains what you will do with the money, include sales projections and detailed strategies that reflect long-term growth.
Some investors want to bet their money on a founder. They evaluate well the ability, the potential and the charisma and the ability to do. It follows that working on yourself is even more important than building a startup.
Fill out the plan in a presentation based on how much money you need. Be well prepared so you can easily talk to investors and convince them to finance your business. Private investors can also be sought through capital brokers who will evaluate your business plan, build investor relationships and match you with the best solutions. It is to be understood that broker fees can be quite expensive.
The Crucial Things an Investor Looks For
- Liquidity - Investors want certainty that the company complies with the liquidity agreement. Liquidity is difficult to estimate, so weekly, monthly and quarterly cash flow should be recorded to track it.
- Expense control - Since high expenses can ruin the business, there should be a mechanism by which those factors that increase expenses can be controlled.
- Clear product analysis - Companies may lose track of how much profits a certain product is making. So, each product should be analyzed to find its real margins.
- Metrics - Investors will definitely want to check some metrics to understand how the company is performing in the market, so the parameters used by competitors should be researched and defined.