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  • 21 October 2014
  • Dr Billy M.

How to convince investors to finance your small business

Whether you've just begun to realize your business idea or you've been operating for some time and need an injection of capital for growth and expansion, investors can be a lifeline. Even if you have no shortage of them, how can you get investors to take the plunge? Your task is to convince them the opportunity you're presenting is sound, with little risk of failure.

Probable investment sources

You may opt for debt, in which case you would take an interest-bearing loan from a financial institution such as CAN Capital or Lendio. You might also seek grants or gifts (most likely from the federal, state, and/or local government, or through private companies) which may come in the form of sponsored competition rewards. An alternative is to look for equity, which will invariably come from investors. This type of deal provides you money in exchange for a share of your business and is typically brokered through business angels and venture capitalists.

Whether you’re an entrepreneur or perhaps an inventor just starting out, it's unlikely you’ll be ready to meet investors as soon as you have your business plan, so be sure to take care of as many details as possible on your own.

  • Business angels typically invest in start-ups. The objective is to provide the money you require to get your idea off the ground, with the angel receiving part ownership in return. Because they are not only relying on your business plan, but also placing faith in your personal convictions and passion, relationships are important, so seek out angels with whom you have a personal connection, such as family friends, colleagues or acquaintances.
  • A venture capitalist will almost always look for an existing business that shows promise for growth and expansion. This type of investor has a reputation of taking big risks to grow businesses. Since there is no surefire guarantee your business will prosper, venture capitalists take that gamble with the expectation of certain concessions. Their investment will be made on an equity basis, which could give them the power to influence the day-to-day operation of your business. This type of investment could also be a mixed blessing if you have to strive to generate high returns quickly.

Whether you're an entrepreneur or perhaps an inventor just starting out, it's unlikely you'll be ready to meet investors as soon as you have your business plan, so be sure to take care of as many details as possible on your own. Having to wait while you handle things like getting the permits and licenses to operate your business, or filing a disclosure with the United States Patent Office will not endear you to investors. Remember this cardinal rule: investors are not in the business of funding your innovative ideas; instead, they seek to earn a substantial return on their investment in a successful business.

How to convince investors

Sourcing for equity demands that you be held accountable in the same manner that investors are held accountable by the financial institutions that lend them money. Observe the following strategies when seeking investment funds:

  • Have a factual basis. Are you confident that an investor will believe you if you tell them your business will be the next Google? Your confidence should come from the amount of truth present in your statements. Likewise, you should be clear as to whether you need $20,000 or $2 million, and for what purposes. You must believe that your business is worth investing in, then determine how much is needed to back it. Investors can tell fairly quickly whether you believe in your own pitch by how well you respond to their questions.
  • Address pertinent issues. Consider the investors' goals. Look at your business from their perspective to understand potential concerns and provide assurance that they will see their money again, that there will be a significant reward for them risking that money, and that the business has a future. Typically these issues are captured in your business plan. Explain how your experience matches your business goals, how growth and performance targets have been or will be consistently met, and demonstrate there is a proven market for your products or services. Finally, reassure your investors that there is a clearly defined exit strategy. This can include identifying potential buyers, and demonstrating a strong commitment to meeting the exit strategy time line.
  • Consider timing. You may need to find alternate sources of financing if you're running short on personal funds. Remember that acting with a sense of urgency can be counterproductive and may suggest a much higher risk to investors. The time to raise money is not when you need it, but when you can convince investors that your business plan is a profitable one.

The bottom line? Begin with a comprehensive and fully validated value proposition so that when you pitch your company, you can do so with confidence and authority — and when you least need the money.

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