There’s a point along every entrepreneur’s path to success where the option is either to acquire capital or watch your company crumble. But there are subtleties to capital that all entrepreneurs should know.
It’s important, for instance, to know that the right kind of funding can have a huge impact on the direction of your company. In a recent survey of small business owners, fully half of the businesses surveyed, with 11 to 50 employees each, listed “cash flow” as their top concern. Twenty-one percent reported a closely related issue, “raising capital/funding,” as their top concern
These concerns reflect what small business owners everywhere face. Capital is easier to access than it has been in the past, but it is still imperative that owners choose the funding source that will best match their specific needs.
Even billionaire entrepreneur Richard Branson has pointed out that an investor’s deep pockets are “not the essential quality that will sustain the relationship and the business in the long term.”
So, if you are unfortunate enough to choose the wrong financial partner, your move – according to Branson and common sense – will “dim the spirit and enthusiasm of a new enterprise, muffling the spark that prompted you to launch this project.”
That spark, Branson said, is the one that “is most likely to make your venture different from your competitors.'” Here, then, are some tips for recovering that spark and finding the right investor(s).
Understand the different investment options you have
The Small Business Administration Venture Capital Guide provides a detailed overview options in the types of investment options you should be aware of.
Private equity (PE)
PE covers a number of investment types that are usually made by private individuals or privately-owned institutions to purchase a company, fund a project or make a private investment.
Venture capital (VC)
VC investments are managed differently and usually designed to fund startup companies with the potential for high growth. VCs also provide startups business-planning expertise and assistance.
Angel investors are high net worth individuals who seek high returns through private investments in startup companies.They provide similar startup financing as venture capitalists in smaller amounts.
Entrepreneurs looking for funding should also consider government venture capital programs available through the SBA’s Small Business Investment Company (SBIC) program. SPICs are privately owned investment funds guaranteed by the SBA to offer equity and debt investments to small businesses.
The SBA itself has loaned out more than $19 billion in 2014 to small businesses. Many of the restrictions that have been implemented in the past have been lifted, and more loans are now available.
How do you choose between seed investors vs. angel investors and venture capitalists? A post on the Grasshopper blog explains: “If you need a small amount of money to get going, you’re looking for seed money. A seed investor invests tiny sums into a company during its earliest days, hoping to grab a percentage of companies before they explode.”
YCombinator is an example of a seed investor, the blog says, continuing: “If you need a larger investment, you’re looking for angel investment. Angel investors are typically retired businesspeople who keep an eye out for investment opportunities. Substantially higher investments tend to come only from venture capitalists.”
How involved do you want your investors to be?
Bo Yaghmaie, a partner at law firm Cooley LLP, has written in Entrepreneur that when meeting with potential financial partners, “You’ll want to ask questions about their most recent investments, what they typically provide to companies, their expectation of CEOs and how involved they like to be.” All of these questions can help determine whether the partnership will be the best one.
Other factors you should aware of when it comes to potential investors include: their area of focus, the stage of development they invest in and their reputation.
Perfect your pitch to find the right match
Take time to think about what you want to say. How will you share your mission and attract someone who shares your vision? Yaghmaie provides pointers in another Entrepreneur article.
He says: “Here’s the short answer: start with a great pitch deck. The pitch deck is arguably the most important document you will generate in the life of your company. It is ‘the hook’ by which you will capture the attention and imagination of an investor.”
Discuss how your product or service will solve a problem. The SBA recommends fine-tuning your pitch based on the investor you’re pitching to.
Finally, have a clear business plan and “be sure to include realistic financials and market research to back up your predictions,” advises the SBA.
“Plan on being able to communicate sound bites from your plan, particularly how you will generate profit and how that will flow into your investor’s pockets.”
When you’re raising capital, you may feel that you should accept any money that comes your way. This approach is wrong, says David Cohen, an angel investor and co-founder of startup accelerator TechStars.
In his book Do More Faster, Cohen explained why the investor-entrepreneur relationship is important. Like any relationship, he wrote, the wrong one can pull you in the wrong direction, whereas the right one will take you where you need to go, faster, more efficiently and as part of a winning team.
This article was originally posted here on Entrepreneur.com.