Financing a start-up business can often be one of the most challenging tasks in an entrepreneur’s journey. While some people manage to save enough over a number of years and others may choose to take out a business loan, often the preferred solution is to find an angel investor.
While investors can be difficult to find, there are wealthy people out there waiting to fund the right start-up. There are, unfortunately, more start-ups than willing investors, which means competition for this kind of funding is high. So how does an entrepreneur go about convincing an investor that their business is worth taking a chance on?
Make sure you’re ready for investment
The first question to ask yourself is: am I ready? Or more specifically, is the business ready for the next stage? From market research to your business plan, financial projections, and marketing strategy, every aspect of your enterprise will be put under intense scrutiny. If you feel there are weaknesses in your business, it’s best to address them rather than try to paper over the cracks. Be proactive about resolving potential objections. For example, if you take out general liability insurance for small business, you are showing the investor that you are realistic about the risks involved but committed to the project.
Find the right investor
When you are sure you’re as prepared as you can be, you need to find the right investor for your business. An investor is not likely to part with their capital without being absolutely sure that it is both a good opportunity and that they will be able to add value through their experience, skills, and network of contacts. Many investors will choose startups which are relatively local to them so that meetings and resources are convenient. They may also choose to specialize in specific sectors and/or those they have a current interest in. You can begin your search with the Angel Resource Institute (ARI), which is an online listing of active angel investors.
Do your research and tailor your pitch
When you have the investor(s) in your sights, it’s time to start researching. You need to find out as much as you can about what motivates them to invest by talking to your contacts, customers, colleagues, or other vendors. If possible, you should find out what kind of businesses they’ve invested in before and what the results were. This process will both help you to work out whether or not the investor is right for you. If they are, you can use what you’ve learned to make your approach with a more personal and well-informed introduction. If you have contacts in common, see if they can recommend you for a meeting so you can start to build your relationship and ensure that you have a rapport.
Focus your pitch on potential returns
Don’t be discouraged if you lack business management experience; if the business concept is strong, investors won’t find it difficult to bring in outside talent for this aspect of the project. Remember, this is likely to help you in the long run. The biggest motivation for an investor is the potential for return on their investment. While it’s important to convey that you understand the potential challenges and how you will overcome them, focus the bulk of your pitch on reward rather than risk. Your business should have the potential to grow significantly in a short period of time, e.g., returning four times their original investment in around three years.