Today’s small businesses exist in a new economic landscape that forces creativity and out-of-the-box thinking when it comes to financing. Small businesses have traditionally been the key driver for economic recovery when it comes to hiring, but hiring requires capital, and capital can be hard to come by.
Finding financing in any economic climate can be challenging, whether you’re looking for start-up funds, capital to expand or money to hold on through the tough times. But given our current state of affairs, securing funds is as tough as ever. To help you find the money you need, we’ve compiled a guide on 10 financing techniques and what you should know when pursuing them.
When pitching an angel investor, all the old rules still apply: be succinct, avoid jargon, have an exit strategy. But the economic turmoil of the last few years has made a complicated game even trickier. Here are some tips to win over angel interest:
- Add experience: Seeing some gray hair on your management team will help ease investors’ fears about your company’s ability to deal with a tough economy. Even an unpaid, but highly experienced adviser could add to your credibility.
- Don’t be a fad-follower: Did you start your company because you are truly passionate about your idea or because you want to cash in on the latest trend? Angels can spot the difference and won’t give much attention to those whose companies are essentially get-rich-quick schemes.
- Know your stuff: You’ll need market assessments, competitive analysis and solid marketing and sales plans if you expect to get anywhere with an angel. Even young companies need to demonstrate an expert knowledge of the market they are about to enter as well as the discipline to follow through with their game plan.
- Keep in touch: An angel may not be interested in your business right away, especially if you don’t have a track record as a successful entrepreneur. To combat that, you should formulate a way to keep them in the loop on big developments, like a major sale.
Angel investors invest in small startups or entrepreneurs. Often, angel investors are among an entrepreneur’s family and friends. The capital angel investors provide may be a one-time investment to help the business propel or an ongoing injection of money to support and carry the company through its difficult early stages.
Angel investors provide more favorable terms compared to other lenders, since they usually invest in the entrepreneur starting the business rather than the viability of the business. Angel investors are focused on helping startups take their first steps, rather than the possible profit they may get from the business. Essentially, angel investors are the opposite of venture capitalists.
Angel investors are also called informal investors, angel funders, private investors, seed investors or business angels. These are affluent individuals who inject capital for startups in exchange for ownership equity or convertible debt. Some angel investors invest through crowdfunding platforms online or build angel investor networks to pool in capital.
Angel investors typically use their own money, unlike venture capitalists who take care of pooled money from many other investors and place them in a strategically managed fund.
Though angel investors usually represent individuals, the entity that actually provides the fund may be a limited liability company, a business, a trust or an investment fund, among many other kinds of vehicles.
An angel investor is a person who invests in a business venture, providing capital for start-up or expansion. Angel investors are typically individuals who have spare cash available and are looking for a higher rate of return than would be given by more traditional investments. Typically an angel looks for a return of 25 percent or more.
An angel investment is a form of equity financing–the investor supplies funding in exchange for taking an equity position in the company.
Angel investors fill in the gap between the small-scale financing provided by family and friends and venture capitalists. Attracting Angel Investors is not always easy, but there are things you can do. First, you need to consider if angel investing is truly for you.
Advantages and Disadvantages of Angel Investors for Business Owners
The big advantage is that financing from angel investments is much less risky than debt financing. Unlike a loan, invested capital does not have to be paid back in the event of business failure. And, most angel investors understand business and take a long-term view. Also, an angel investor is often looking for a personal opportunity as well as an investment.
The primary disadvantage of using angel investors is the loss of complete control as a part owner.
Your angel investor will have a say in how the business is run and will also receive a portion of the profits when the business is sold. With debt financing, the lending institution has no control over the operations of your company and takes no share of the profits.
Sources of Angel Investors
Angel investments normally come from:
- Family and friends – this is by far the most common source of funding for business startups that are interested in Finding Business Start Up Money and is the only option for many. Given the high rate of failure with new businesses, it is also risky in terms of the possible impact on family/friend relationships if the business is not successful. It is important to be upfront about the risk of failure.
- Wealthy individuals – another good source are successful business people, doctors, lawyers, and others that have a high net worth and are willing to invest up to (typically) $500,000 in return for equity. Often this is done by word of mouth through business associates or associations such as the local Chamber of Commerce.
- Groups – angels are increasingly operating as part of an angel syndicate (a group of angel investors), which raises their potential investment level accordingly. Investors contribute funds to the syndicate and a professional syndicate management team chooses the investments. How to Find an Angel Investor, gives some examples of active Canadian angel groups.
- Crowdfunding – a form of an online investing group, crowdfunding involves raising funding by having large groups of individuals invest amounts as small as $1,000. If this route interests you, you can Read about the current state of crowdfunding in Canada to get a sense of today’s crowdfunding landscape.
It’s important for any business person thinking about accepting an angel investment to be very clear about what the investor is bringing to the deal besides money, and to develop an understanding of what the angel investor would be like to work with.