Growing a business at the beginning is difficult without proper capital raised. Launching a startup demands time, effort, strategy, and creativity, and lacking the funds to bring it to life can be incredibly frustrating.
While banks aren’t always too keen on lending money to high-risk startups, there’s a group of people who will — investors. The key is finding and persuading investors who share your values and goals and are committed to growing your business.
There are many ways to find and choose the best small business investor. Let’s go over how you can be best prepared to share your business, the different types of investors, and where you can meet prospective investors. By the end of this, you’ll be able to pick the right investor and feel confident in the future of your startup.
Are you ready for investment?
Before finding a small business investor, you must analyse your business and see if it’s ready for investment. Are you at a stage where you are prepared for extra capital to cover your business costs? Are you looking for a stepping stone to scale your business further into the market? If you answered yes to either, speak to an accountant or a lawyer for professional advice before working with investors.
Once you decide that investing is the best next step, you must prepare three key things before putting yourself out there to investors.
- Have a clear business structure. You’ll want to share with investors the structure in which your business is managed, how it functions, how you achieve minimal risk, and what goals you have set for success. Depending on your situation, there are various business structures to pick from—sole trader, partnership, trust and many more. If you’re unsure which is best for you, learn about all the options here.
- Plan how many investors you want. One investor who’s really into your business is often preferred because the more you have, the more diluted your equity becomes because it’s shared over more people. Having too many investors at once will prevent more prominent investors from investing in the future.
- Investors will want to see your business valuation, which outlines your company’s worth in shares. It’s essential to have this ironed out to know how much your company is valued if you consider selling, merging, acquiring, or adding new shareholders. Various factors impact this, such as length of operation, cost of capital, future growth potential, intellectual property, and more.
With your business structure chosen, the number of investors, and the business valuation determined, you’re ready to start securing funding and building valuable partnerships with investors.
What do investors want to know about your business
A small business investor needs to see value in your business to invest in the first place. This is because they want to see a return on their investment. Here’s how to show its value in 5 steps.
A detailed business plan
Every business needs a business plan to succeed. Think of it as your blueprint, where all your internal information is stored for business needs and future references as you expand. A business plan shows investors that your business isn’t just an idea you’re toying around with but a grave, actionable plan ready to take to market and thrive. It should include an executive summary, which provides an opening statement to the plan, along with a business description, company structure, market analysis of existing competition, competitive analysis, marketing plan, and financial plan. Learn how to write an effective business plan here.
What differentiates your business in the market
Investors must clearly understand what makes your business stand out in the market. If it’s too similar to existing competitors, the chances of survival and profitability are slim, reducing investor interest. However, if it’s overly risky or unconventional, that may also deter investors. Your business must have a clear and compelling unique selling point that sets it apart while addressing a genuine need. Investors often look for patents, intellectual property protection, and exclusive licenses or marketing agreements because these assets provide a competitive advantage.
Financial records and how profits are made
Next, you need a business model demonstrating how a profit is made after all other costs are accounted for. You can do this by first clearly stating who your target market is, their demographics, and their purchasing behaviour. Once established, use your business model to explain how the income is generated through different revenue streams. Outline all the expenses required to run the business, such as manufacturing, employee payments, marketing expenses, burn rate, and business logistics. Have your turnover and profit predicted for the upcoming months and your cash flow statements easy for investors to read. Be clear about your competitive prices and how they cover your production costs and help you make an overall profit.
A knowledgeable team that provides value to the business
To have a successful business, you’ll need a successful team. The brains behind your business are often more important than the product itself because a strong, skilled team can adapt to challenges, innovate, and continuously improve the business. Even if a product initially lacks perfection, a talented team can refine it, pivot strategies, and find solutions to meet market demands. It takes a visionary business leader who embraces change and a team with the skills and drive to deliver improvements beyond immediate results. An investor who connects with this and sees how it aligns with their investment goals will be inspired to invest.
Expansion and future growth goals
Investors want to see there is room for growth in a business. Clearly outline your expansion plan and the steps to be taken once investment is secured. When getting ready to negotiate with investors, having a professional valuation of how much you plan to deal with them is also critical to reaching that expansion level sooner. As you think about your future growth goals, have an idea of your top business goals and ensure the investors you speak with align with them. Do you plan to grow your business? Sell it? Do you plan to get more investors onboard after the initial one is found? Finding an investor or a group of investors that align with your business aspirations is vital.
The types of business investors
Now that you know how to be prepared for investors and what investors are looking for from small business owners, it’s essential to review what kinds of investors are out there. Most startups and small businesses get funded at that start through bootstrapping, where the entrepreneur will self-finance their business through their savings. But unless you’re flourishing with extra cash, this runs out quickly, so it’s time to look to others for help.
Crowdfunding supporters
Let’s start with crowdfunding. This option allows entrepreneurs to showcase their products or services online and seek initial seed funding or donations from the public. It’s an ideal way for startups to set modest goals and begin raising capital from a broad range of contacts. While it’s rare that crowdfunding alone will cover all the funding needed, every contribution can make a difference and help a startup avoid taking on loans or going into debt.
When someone invests through a crowdfunding website, there are three ways they can be rewarded for contributing:
- Reward-based crowdfunding: Small amounts of money in exchange for a reward, like a future product.
- Debt-based crowdfunding: Investors provide loans to businesses and earn interest without owning a stake in the company.
- Equity crowdfunding: Investors receive shares in the company, meaning they don’t get an immediate return but can profit if the business succeeds.
Accelerators and incubators
With a solid business foundation and a clear need for capital, your startup is now ready to be pitched to the public. This is where accelerator programs and incubators come in. These organisations are designed to help startups get off the ground and running. They have the financial backing and seed money to offer startups cash for joining their accelerators, access to mentors to help startups thrive in their specific industry, and planned pitch nights for startups to meet with higher-level investors when ready to scale.
Angel investors
Angel investors are known for saving startups as ‘angels of a business’ because they swoop in and invest a lot of money into a business in exchange for convertible debt or ownership equity. These individuals can be found through startup accelerator programs or at general pitch events you may attend in your city. This is why networking and getting your business out there is to reach the capital you desire. Once connected with one of these investors, they will likely want to negotiate their share and, if chosen, take an active role in key business decisions, which may reduce the entrepreneur’s control but provide significantly more capital than without one.
Private investors
A private investor is similar to an angel investor but tends to operate more discreetly, keeping their involvement low-profile. They typically offer funding in exchange for equity in your business, becoming your primary (and often sole) funding source from the outset. While they provide the necessary capital to fuel the startup’s growth, they may prefer to remain behind the scenes rather than take on a high-profile public role. The best way to connect with a private investor is through personal referrals, relying on your existing network. Since private investors often work in a more personal, trusted environment, leveraging your connections—whether through mentors, industry contacts, or business associates—can help open doors and facilitate introductions to the right individuals.
Venture capitalists
Lastly, we have venture capitalists who provide capital to startups with high growth potential relatively quickly. They tend to invest a high amount in exchange for equity shares in the business. They source their capital from various places, such as financial institutions, pension funds or corporations. Usually, these firms want your business to go public or be purchased by a larger corporation later. These investors will attend startup networking events such as demo days or industry conferences and conduct market activity research to find their next investment.
What’s the benefit of investing for investors?
So, why would someone with so much money want to invest in a small business? Well, they invest because, despite the risks, there’s the potential to earn even more money. It also gives them the opportunity to:
- Diversify their portfolio.
- Have control or influence in a business.
- Support innovation or ideas.
- Gain more income (e.g., dividends or interest).
- Reduce tax liability.
- Hedge against inflation.
- Build a legacy or make an impact.
After the initial investment, investors are often paid back through quarterly dividends from the company’s profits. Some companies may also buy back shares or refinance debt to repay investors. With angel investors, you don’t repay them like a loan. Instead, they get a stake in your company and earn returns through dividends from profits.
How to find investors
Now that you know what you offer and who to look for, you must know where to look for them.
As mentioned earlier, applying to local accelerator programs in your closest city or attending business incubators through non-profit organisations, government agencies, or business schools are all great places to start finding investors. This is because they are geared to help startups with unique ideas that are ready to thrive. They have opportunities for funding, industry advice, mentoring, and exposure to pitch nights and networking events. They also have office space for you to work in and a community where you can meet other entrepreneurs across various industries.
You can attend as many industry networking events as possible in your city. Start meeting new people, finding like-minded individuals, and try reconnecting with old connections, too — all will help you gain visibility. Investors are great to meet, but so are mentors and other industry-related professionals. If you keep your network active and constantly put yourself and your business out there, you never know who you could meet and how they could add value or change your life (or you could change theirs).
Local co-working spaces, conference events, and university pitch nights are always happening. They are great spots to find investors, so begin connecting with co-working events, signing up for upcoming conferences, and contacting university alum groups for networking opportunities. Outside of that, you can jump onto a crowdfunding website, as mentioned before or connect with equity funders or venture capital firms through your bank. The endless opportunities are all about how much energy you pour into it.
How to choose the right investor for your business
Investors need to match your business as much as your business needs to match the investor. You want an investor who you can learn from, who will be willing to share their industry knowledge, and who understands market trends. Someone with experience will provide more value than someone who doesn’t fully know what they’re getting into.
It’s a bonus if the investor is well-connected locally and potentially in the region you want to expand into. If they live near you, it will be easier to reach them, set up meetings, and expand if they have more connections in the necessary spots.
You also want an investor with a positive track record of past investments. Before committing to them, check if their previous investments have performed well. Pick a loyal investor who won’t lead you on or leave you high and dry. Someone committed for the long term will do all they can to help you scale — that’s what you want to see.
Once someone is picked, chat with them to confirm you’re on the same page because investing is a two-way street. You want someone who you can trust, who you want to invest time in, and who will make you better as an entrepreneur.
Find investors for startups today
It doesn’t take much to meet prospective investors once your business is developed. Whether you’re seeking initial seed funding or funding to scale, attending industry networking events or pitch nights at coworking hubs is the perfect place to start.
At Melbourne Connect Coworking, we bring together small business owners, innovators, and entrepreneurs daily. We have built the ideal working and networking community for individuals seeking connections around Melbourne. Not only do we offer memberships for you to work in our space, but we also hold a variety of events: member breakfasts every Wednesday, monthly coffee clubs, educational workshops, and consistent networking events.
If you’re ready to gain outside connections and investment opportunities, contact us today!