Investors love early-stage companies—if they can deliver.
Just like human beings need oxygen, businesses need funding if they’re going to get off the ground or grow.
For the typical small business, that money comes from the owner’s personal funds or a bank loan. But when it comes to companies with the potential for high growth—especially startups in the tech industry—another option becomes available: equity funding.
Capital from equity funding is acquired in exchange for shares of ownership in the company or convertible notes that start off as debt and are later converted into company shares. Put simply, you agree to work with an investor.
There are a few important points to remember before you start thinking about raising equity investment. First off, it’s not an option for every company.
» Do you have a company that looks to grow very large, very fast—hitting $10 million to $20 million in annual revenue within three to five years?
» Do you have a clear-cut path to a profitable exit? That is, how will the investors get their money back? Will you sell your company to a larger concern or an equity fund? Maybe even do an initial public offering (IPO)?
Investors in early-stage startups tend to be high-net-worth individuals—or “angels,” as they’re commonly called. Angels are drawn to startups because these ventures can offer a higher rate of return than investors might get in the stock, bond or real estate market. Which means they need to see a strong possibility you will exit your company and be able to offer a 10X return (or greater) to that investor within just a few years.
Another word of caution: Before you seek help from an outside investor, the first money you put into your venture needs to come from your own pocket.
The Most Common Investors in Young Companies
Kansas City is home to a growing number of seed and venture capital funds, but if you’re a young, growing business, you’re more likely to find help from one of the three following sources.
Friends and Family
These people know you best, are usually willing to take a chance on you and are great references down the road as you raise more funds.
Investment from friends and family is a stamp of approval that you should attempt before pitching to angel groups or networks. I always say, “If you can’t raise money from folks that know you, why would a group of random people invest in your venture?”
It’s extremely tough to mix personal and professional relationships. Only one in 10 startups succeeds, and losing your family’s money can make for a very awkward Thanksgiving dinner.
Individual Angel Investors
If you find an individual who has expertise in your space and is willing to invest, that person can bring incredible value to your business and not just in the form of dollars. Your lone angel can use his or her professional network to help you make connections—with clients, vendors, distributors—and accelerate your growth.
Sometimes these folks are hard to find. Many like to stay anonymous.
Angel Investor Networks
Angels aggregate their money so they can invest more than the individual investor would. Group members have lots of connections and expertise you as an entrepreneur can tap into.
Your business model and your exit strategy for how investors get their money back need to be extremely well articulated, as this group of individuals does not know you personally.
Tips for a Successful Investment Experience
» It’s tough to get investment for your very first startup. If you don’t have startup experience, get someone on your team who does.
» When you bring an investor aboard, you are selling ownership. You don’t own your entire company anymore. And you are not your own person when you have investors; you’re part of a team. You can’t decide everything by yourself.
» Choose your investors wisely. As a small business owner, you need guidance and mentoring as much as, if not more than, a check.
» You’ll also have to determine how much of the company you’re willing to sell and how much that ownership is worth. You need to set a valuation.
Finding that number is as much an art as it is a science. There are formulas you can use to value your business, and there is no need to spend a lot of money on obtaining a valuation. There can be, however, future consequences for both the entrepreneur and the investor when over- or undervaluing a company.