woman presenting to a group of investors
There are several routes to take in order to fund your business — from tapping family and friends to presenting to venture capitalists. — Getty Images/PeopleImages

If you’re just getting started with your business, you may be trying to choose between bootstrapping or finding investors. If you’re already bootstrapping, you may wonder if there’s an ideal time to attract investors. There are many things to consider in making these decisions. It’s important to understand the types of investors, why investors invest and how investments can impact you and your business.

The world of business investing can be confusing and intimidating. Identifying the various investment stages and how they align with your business’s growth are key in understanding if, how and when you can get your business funded.

[Read: Bootstrapping vs. Raising Venture Capital: Which is Right for Your Business?]

Investor motivations

Investors are taking a risk by investing, and they do so with the expectation that if their informed gamble pays off, they will reap financial rewards. Their top motivations for investing include:

  • Equity shares. In return for their funds, investors receive an equity share in your company. As a result, they will get a percentage of the funds if the company is sold or liquidated.
  • Business decisions. Be prepared to give investors some decision-making power. If you are not the majority shareholder, you could be out-voted and even voted out. This gives some entrepreneurs — especially those who want to keep a family-run business — reason to pause before seeking investors.
  • Eventual sale or initial public offering (IPO). For many investors, the ideal business owner will have an exit plan because most investors are interested in companies that have a high likelihood of being bought or going public. “Investment by outsiders is for scalable, defensible, high-profile startups with proven management teams,” according to an article on Bplans, a resource site for entrepreneurs. “Unscalable services don’t attract professional investors. And there has to be a real commitment to a credible exit strategy in three to five years. If you don’t like these criteria, rewrite your business plan to need less investment.”
  • Ensuring success. Many investors are also motivated to mentor you, sharing their experience and skills, to ensure the venture in which they placed their funding is going to succeed. Your investors may also have professional and financial connections that can help your business grow. The level of their involvement will vary by the type of investor as well as the personality of that individual or the approach of that investment group.

Investors are taking a risk by investing, and they do so with the expectation that if their informed gamble pays off, they will reap financial rewards.

Types of investors

From pre-launch through to late stage, your financial needs vary. Your business’s level of risk and potential for a return on investment (ROI) also varies, which greatly impacts the likelihood of finding investors, as well as dictates the type of investors you’ll attract. Below we look at four categories of investors:

Angel investors

An angel investor may be an individual or a group. These investors generally invest early using their own money. Like most investors, they want to find companies that have the potential for growth and will result in a good ROI for them. Bplans suggests some sources for finding these investors, including your local Small Business Development Center (SBDC) and online platforms, such as Gust Angel Network and AngelList.

Venture capitalist (VC)

While it seems that venture capital (VC) is the most frequently referenced type of financing, it’s actually not something most businesses will ever receive. VC is generally provided by a VC firm, which manages finances from many investors and looks for very specific types of companies to invest in. They invest in high-risk opportunities that have high ROI potential. The investment is considered long-term at upwards of five to eight years because that’s how long it generally takes for a company to become ready to be sold or to go public. This is the outcome most VC firms desire, and it will likely influence the way they steer your business.

Early-stage VC

Early-stage investors are looking for companies that have proven their concept and are generating some revenue. These companies have reached a point where funds are needed to build out sales and marketing efforts so that they can grow. According to Forbes, investors at this stage typically write checks for $1 million to $5 million. This funding would be for companies in Series A and potentially Series B.

Late-stage VC

Late-stage VC is invested in companies in Series C or beyond that are well positioned for sale or IPO. These companies are generally known in their market and may be ready to expand into other markets. The risk to investors may potentially be lower at this stage as the company may be cash-flow positive and have a solid understanding of how to grow.

[Read: Need to Raise Business Capital? Know These 5 Funding Rounds]

There are also approaches to raising funds, often in smaller sums, from non-professional investors. For example, some entrepreneurs get a boost during their pre-seed stage from family and friends willing to help finance their vision. Additionally, in May 2016, the last provision of the 2012 Jobs Act was implemented, which allows for equity crowdfunding. As a result, you can now also find investors through online equity crowdfunding sites, e.g., WeFunder.

[Read: 3 Practical Tips for Attracting Investors]

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

Published September 12, 2019