Approaching venture capital or angel investors is never easy, and getting interest in your small business can be exciting. However, not all investors are created equal. It’s vital to ensure that your potential investor is actually a good fit for your business – and will help rather than hinder.
Here are some things to look for in a potential investor:
Attitude – Do they have a real interest in helping you build a successful company?
Reputation – Research, research, research. What are they like? Who have they helped? What do people think about them?
Experience and education – Can they offer real experience or a strong, relevant education?
Their commitment – How busy are they? Do they actually have time to work with you?
After your potential investor has gotten to know your business, you can ask certain questions to get to know them better. Here are some examples:
What do you think of our business model? What have we missed? What are we doing well?
Have we missed any competitors in our analysis that you think may be a problem for us?
What would you change about the way we’re doing things? Why?
How strong is our team? Who or what are we missing?
How much do you think our company is worth? How much would you be prepared to invest?
These questions will give you insight into your small business from objective third parties. These answers can make a real difference in your business’ future. And don’t feel weird about asking – a good investor will be willing to answer!
Take your time and carefully research their background and track record. Nobody’s expecting you and your investors to be best friends, but there should be good chemistry between you. If there isn’t, keep looking.
Do you need to raise more funds than you can get through “love money” from family or friends, but don’t need as much as venture capitalists invest? Your small business may be ready for an angel. Angel investors are well-to-do people who invest money, usually their own, in start-up ventures. For that investment, they often get a portion of the ownership of the business.
So what do angel investors like?
A patentable technology or process
A product or service with a distinct competitive advantage or very unique selling proposition
A strong team — preferably with experience
How to find angel investment in Canada
The secret to finding individual investors is through networking. Communicate regularly with business community members who are in touch with angel investors like lawyers, accountants, bankers and other business owners.
You may also want to investigate one of the angel networks that operate across Canada. Here are a few:
Here are some blog posts that we found informative and inspiring this week. From passion to customer service to creativity – we think our fellow entrepreneurs will find some value in these articles. Enjoy!
“Where do I get the money to start my business?” is perhaps the most common question entrepreneurs ask. Of course, this question assumes that they know how much money they need to start their business in the first place.
Develop a plan that outlines funding sources for your small business
Where you go for funding can be different for every small business. Several factors influence the type, cost and suitability of financing for your small business, including:
Stage of the venture process. Are you in the start-up phase? Are you growing your small business? Is your business well-established?
Your small business’ achievements and financial performance to date
The state of the industry your business is in
The type of technology your business is based on (if any)
Potential growth of your venture
Number of years before an exit strategy is available for investors
Investors’ required rate of return on their money
Amount of money you need
What your company is worth
Your goals for your company
Investors’ terms and conditions
There are many other factors that will come into play when it comes to choosing the most appropriate sources of funding for your business.
Generally, a new small business can be funded in one of two ways: equity (ownership) or debt (loan). With equity financing, you exchange a piece of ownership of your business for the investment capital – you’re giving up part of your company to receive money to start or grow. The amount of your company you give up is negotiable, but it’s related to the size of the investment and the value of your company. If you fail, investors lose their money – you’re under no obligation to repay the investment. With debt financing, you borrow money and repay it over time to the lender. If you fail, you’re still obligated to repay the loan in full.
Money is just one factor of a successful small business
Most new entrepreneurs believe that if they have enough money, they can make any business model into a successful business. Sadly, there is nothing further from the truth. A bad idea is a bad idea is a bad idea, no matter how much money you throw at it.
The reality is sufficient start-up capital is only one element of a successful new business. Research shows that the small business owner’s reputation and depth of their social network are important to securing financial help. Not all businesses need start-up capital – but for most, the need for money comes at some point in their business’ life. So, develop a solid financial strategy, but remember that money is but one pillar of a strong small business.
However, to me the main difference between the two not mentioned by Jim is the “patience” factor. Angel money is patient money. Well, at least more patient than VC money. VCs want the big return – fast. VCs want the elusive five or ten time original investment return on their money. On the other hand, angels are satisfied with a longer payout and lower rate of return.
Great post, Jim, and good food for thought when it comes the different motivations behind angel vs venture capitalist investment! Check out Jim’s post here.