You poured your heart and soul into your business, and now it’s time to determine how to attract investors and secure funding to continue growing. But how would you fare if investors – like VCs, angel investors, and bankers – were to evaluate your company? What components will drive their decision to invest or not? When you know what to expect, pitching your idea to investors may feel less intimidating and more like, “Let’s see if we’re the right fit.” The process of getting startup funding for your business may put you on edge just a bit— not because you don’t know your company inside and out, but because you’re uncertain what will be asked of you when you meet with potential investors. We’ve worked with all kinds of entrepreneurs from many industries. Here are 11 steps that will help you attract investors and get funding for your startup business: 1. Develop a Strong Business Plan Want to read this later? Download the PDF: Your business plan is an all-important document that proves one thing to investors: that your business is worth their risk. Your plan should clearly outline your business objectives and goals and demonstrate your team’s expertise in your field. Show that you have a deep understanding of your customers (your target market) and provide a complete description of the product or services you offer. Read: Business Startup Checklist: A Cheatsheet for New Entrepreneurs An essential section of the business plan is your marketing plan. It defines your market size and growth prospects and should show trend influences and sales potential. Here is where pricing, promotion, and distribution strategies come into play. Talk about barriers to entry as well, addressing how you plan to keep competitors at bay. Finally, make things digestible for everyone by presenting your business plan in an engaging format. Not only does this make you stand out, but your audience may also actually thank you for it. It’s worth noting that investors already familiar with your industry and market may be more likely to invest in your company because of their expertise and comfort. Note their knowledge may also mean more targeted questions for you, so be prepared to showcase your experience. A transparent, replicable business model that is scalable and as detailed as possible is essential. Show investors that you not only forecasted growth, but you’ve planned for it. Be ready to prove how your business model will help your company become more profitable. Emphasize financial and market issues, as these are vital areas for investors.A reasonable forecast model is a tool for investors to determine how well you know your market and your presumptive success concerning your market. Your model should be realistic but also show enough revenue and growth to keep investors interested. Just be ready to explain how you’ll achieve your numbers. Consider providing conservative and aggressive forecasts to show alternate assumptions— from more cautious to more optimistic. Remember that forecasting is an ongoing process that requires constant reassessment. The more up-to-date your projections, the better prepared you’ll be to make informed strategic decisions for your business. Investors want to speak directly with customers who have first-hand experience with your product or services. A conversation with a customer brings a unique perspective about your company that simply cannot be gained through a meeting with you or by reading your company’s marketing materials or website. Investors are looking to understand the value your business brings to customers, the process your customers went through when deciding to buy, what your customers’ user experience is like, and what differentiates you from competitors. Have customers ready to offer interviews to potential investors when the time comes. Intellectual property, or IP, is more important today for businesses than ever, particularly for technology start-ups and manufacturing firms whose knowledge serves as a sustainable and defensible differentiator for the company. The three types of intellectual property are patents, trademarks, and copyrights. Investors want to see that you know what IP your company needs to protect and how to protect it. According to the Startup Genome Project, IP has been identified as the critical ingredient for startups worldwide to gain a competitive advantage in the market. A capitalization table (cap table) lays out all the equity and debt ownership and liquidation rankings of the various investors or lenders invested in a business. For investors, a cap table is valuable because it reveals precisely how much the company’s founders may own. Investors want to ensure their interests are aligned with the founders, and there is enough equity left over to bring in investors at later rounds. Be forewarned that “founder dilution” can raise a red flag—where cash provided to founders can come on onerous terms. Your company’s financial statements tell a lot about how you operate your business. In particular, investors care about your cash flow, your debt obligations, and your equity. Having cash in the bank proves you’re prepared for unanticipated problems and that you can capitalize on new opportunities. Good cash flow (and providing a strong cash flow projection) is a sign of sustainable operations that comforts investors; they trust you can stay outside the “red.” Alternately, debt obligations translate into cash being eaten up in debt payments. Slow months can mean your inability to meet payroll and other expenses. What about equity? Investors are interested in buying stock in your business, so they’ll use your financial statements to calculate your company’s worth to shareholders. Investors want to know precisely how your company plans to use its proceeds. Will you allocate their money to capital expenses? Research and development? Legal and accounting fees? What about recruiting costs and salaries? Establishing capital efficiency early in the process can help your company develop insightful leadership and ultimately make you more attractive to investors. Be prepared to explain to investors what milestones you’re aiming to achieve and the anticipated results. Read More: How to Instill Financial Discipline in Your Leadership Team Investors analyzing your company's potential for investment will examine your financial performance from every angle. Let them know how you intend to grow your business quickly using the least amount of their invested cash. Spending wisely should be your objective regardless of economic conditions, so set a track record for sound money management. Total addressable market, or TAM, informs investors as to the potential size of your market. How many customers can be reached? How long might it take to become a market leader? Understanding market sizing not only helps in steering your business but also aids in determining your go-to-market strategy. Understanding your TAM will help you make predictions about your market’s true size, how many prospects you can expect, how long your sales pipeline will remain satisfied, and potential revenue for a specified time frame. Investors want to know how you plan to utilize your resources to reach and deliver value to customers to gain a competitive edge. Fluidity is key—as your market, industry, and business change, so must your strategy. Keep in mind that investors want companies that can grow quickly and manage that growth. You must be able to articulate your TAM to investors and discuss your strategy to achieve it. There is no business without sales. Investors must be convinced that people are willing to buy your product or services. Your product or service must stand out from what’s already being offered in the market. Your differentiators should be easily definable when explaining the sales process to investors. Perhaps your competitive advantage lies within your intellectual property, or maybe you’re solving a problem in a new way. Be prepared to prove to investors, using concrete evidence, that your market potential is large enough to warrant an investment. Provide a track record of sales you’ve already made (breaking down the number of prospects at each stage in the buying process) and show how you plan to continue to expand your pipeline to grow the business and make money. G-Squared Tip: Explain how you’ll “build a moat” around your business, such as using patents or other intellectual property to protect your unique position. Address the intangible elements you’ll use to protect your brand, making it as impenetrable as possible. Investors interested in investing in your company will unquestionably have an attorney conduct a complete legal review. The legal due diligence process, while stressful, is essentially the final check on all legal aspects of your business and team. Investors not only gain deeper insight into your company and operations before purchasing, but they also use the information gleaned to help them determine their purchase price. It’s wise for their legal team and yours to establish a good rapport for the process to run as smoothly as possible. For more on legal due diligence and proper planning, take a look at the article: "What Every Business Owner Needs To Know About Legal Liability". Investors have a keen interest in both you (as the CEO) and the management team—from understanding their industry background to their business experience. They need to feel confident that you and your team can lead the company to grow and make a return on their investment. As a “top banana,” your experience matters profoundly to investors. They want to know you have a proven track record for superior performance and expertise and leadership in your industry or previous venture. Ensure you exude confidence and passion and demonstrate your willingness and ability to change course should your company need to shift direction. Other positive traits investors look for in CEOs are the ability to make decisions with input from your leadership team (there’s no room for indecisiveness), excellent relationship and networking skills, and the ability to build a company around core competencies and deliver on them. G-Squared Tip: References will likely be contacted to vouch for your team members, as such “outsiders” can provide perspective regarding your team’s talent, track record, and potential for success. Investors assume risk whenever they invest. An exit opportunity provides them a “reward” for their risky move. It’s therefore imperative to integrate an exit strategy into your business plan. Let investors know how you plan to return their investment (and then some!). Will you pursue an acquisition? Merge with another company? Choose an exit strategy that aligns with your business and personal goals. Your time frame may vary, so think about when you may want to implement your exit strategy as well. The objective is for all parties to exit profitably. Once your meeting is over, let us know how you did! We’re seasoned in helping entrepreneurs like you lay the rock-solid financial groundwork that investors are looking for when pinpointing businesses for funding. As exhilarating as it is, the fundraising process can be intimidating. But when you’re prepared, you can go in strong and confident—moving you one step closer to achieving your goal. Need help getting your financials in order? Learn more about our CFO and bookkeeping services or schedule a consultation. Do you have further questions about how to attract investors to your business? Drop us a line by filling out the contact form below. G-Squared provides strategic financial, accounting, and operational expertise to CEOs and entrepreneurs.-png.png "How to Attract Investors and Get Funding for Your Startup Business (1)")
2. Develop a Forecast Model
3. Obtain Customer References
4. Address IP
5. Be Ready to Explain Your Cap Table
6. Explain Your Financial Statements
7. Justify Use of Proceeds / Funds
8. Acknowledge Total Address Market and Go-To-Market Strategy
9. Present a Strong Sales Pipeline
10. Perform Legal Due Diligence
11. Provide Management Team Bios & References#1. Develop a Strong Business Plan
#2. Develop a Forecast Model
#3. Obtain Customer References
#4. Address IP (if applicable)
#5. Be Ready to Explain Your Cap Table
#6. Explain Your Financial Statements
#7. Justify Use of Proceeds (Use of Funds)
#8. Acknowledge Total Address Market and Go-To-Market Strategy
#9. Present a Strong Sales Pipeline
#10. Perform Legal Due Diligence
#11. Provide Management Team Bios & References
Final thoughts
FAQs
How to Attract Investors and Get Funding for Your Startup Business? ›
A great way to meet potential investors and VCs is to attend startup events—industry conferences, pitch competitions, meetups, etc. These events give you a chance to network with other startups, learn from successful founders, and meet investors face to face.
How do I approach an investor for startup funding? ›- Keep your pitch concise and easy for the average person to understand.
- Stay away from industry buzzwords the investors may not be familiar with.
- Don't ramble. ...
- Be specific about your products, services, and pricing.
- Emphasize why the market needs your business.
- A market they know and understand.
- Powerful leadership team.
- Investment diversity.
- Scalability.
- Promising Financial Projections.
- Demonstrations of consumer interest.
- A clear, detailed marketing plan.
- Transparency.
A great way to meet potential investors and VCs is to attend startup events—industry conferences, pitch competitions, meetups, etc. These events give you a chance to network with other startups, learn from successful founders, and meet investors face to face.
How do I find private investors for my small business startup? ›After you have a fine-tuned business plan, look for private investors. Start small, working through your professional and personal networks. Try your chamber of commerce, small business community groups, and local trade associations. You can also seek private investors through business capital brokers.
How much money do investors give to startups? ›Most founders can expect to give away at least 10 percent of their startup during the initial seed round. Startups without any cash flow or customers will likely give up more equity. After the initial round of seed funding, many startups grow (or fail) without any further investments.
What is a fair percentage for an investor? ›The greater the stake in a company, the better. All in all, holy messenger investors hope to get their cash back within 5 to 7 years with an annualized inner rate of return ("IRR") of 20% to 40% of stake in a company. Investment reserves take a stab at the higher finish of this range or more.
What are investors looking for? ›Investors want to know the size of the overall market and the total number of potential clients. The investor would hesitate to invest if the planned market size is insufficient since they might not receive sufficient profits. It must be remembered that the company should be sustained over the long term.
What do investors want to see in a business? ›Investors will want to see information that indicates the current financial status of the business. Usually they will expect to see current reports such as a profit and loss statement, a balance sheet and a cash flow statement as well as projections for the next two or three years.
What do investors get in return? ›Distributions received by an investor depend on the type of investment or venture but may include dividends, interest, rents, rights, benefits, or other cash flows received by an investor.
What are the 3 types of investors? ›
The three types of investors in a business are pre-investors, passive investors, and active investors.
How to fund a startup without investors? ›- Angel investors.
- Debt.
- Crowdfunding.
- Grants.
- Friends and family.
- Investment firms for bootstrappers.
- Revenue.
An LLC can bring in investors from corporations, and partnerships to raise funds for your firm if you arrange it as a limited liability company. Money managers or money management firms are the vernacular terms for an asset management firm.
How do private investors get paid? ›Part of the returns for investors in private equity is through receiving dividends, much like shareholders of a public company do. This process is known as dividend recapitalization and involves the process of raising debt to pay private equity shareholders a dividend.
Do startups have to pay back investors? ›Investors provide startups with the capital and resources necessary for growth while startups exchange a percentage of their value, which will lead to profits once it's time to exit. This investment does not have to be paid back to the investor.
How much does 500 startups invest? ›Being a 500 Global company will validate your business, and our network will help you connect with investors when the time is right. 500 Startup's standard accelerator deal is a $150,000 investment in return for a 6% stake.
How much money do investors usually give? ›Our advice is to stick to the general rule of 20 to 25% of businesses income. If your investor is more interested in cashing in on equity growth, you can offer 15% of the business or more, depending on how much money the investor provides.
What is the 99 investor rule? ›The SEC stipulates that accredited investors cannot pool their money and create a single entity (for example through an SPV) to invest in the fund – the SEC will “look through” this entity and count the number of investors there as long as the entity was created for the purpose of making a specific investment.
What is the 7% investment rule? ›Let's say you have an investment balance of $100,000, and you want to know how long it will take to get it to $200,000 without adding any more funds. With an estimated annual return of 7%, you'd divide 72 by 7 to see that your investment will double every 10.29 years.
What is the 500 investor rule? ›The 500 shareholder threshold was a rule mandated by the SEC that required companies to publicly disclose financial statements and other information if they achieved 500 or more distinct shareholders.
What are 5 tips to beginner investors? ›
- Use your personal brand knowledge. ...
- Know the fundamentals. ...
- Use technical indicators to spot trends. ...
- Do the math. ...
- Commit to investment goals.
While some investors prefer more liquid investments, such as stocks, others like longer-term investments, like real estate. Some typical investment options include: Stocks (such as common stocks) Bonds.
What are five tips for the first time investor? ›- Establish a Plan. ...
- Understand Risk. ...
- Be Tax Efficient from the Start. ...
- Diversify. ...
- Don't chase tips. ...
- Invest don't speculate. ...
- Invest regularly. ...
- Reinvest.
- Investing in a vacuum is never a good idea.
- You have an advantage over the pros.
- Asset allocation is THE most important part of investing.
- Investing is risky!
- What does the business do and how will it create shareholder value? ...
- In which sector does the business operate? ...
- What problem does the business solve? ...
- Is this a genuine problem? ...
- What is the unmet market need?
Skip the small talk.
Instead, get into the main reasons for your conversation. Most investors want to know about your business and why it's great. They also want to know how your business will help them. In other words, they want to know what kind of return will they get for their investment in your business?
What Do Investors Look For In Financial Statements? Of all the things company financial statements reveal to an investor, there are four main factors investors consider: revenue, profitability, debt level, and cash flow.
What information is most important to investors? ›Earnings and revenue growth. If you invest in a company, the most important thing is the bottom line. You want to know how much the company earns and whether it's boosting its sales.
How do you know if an investor is interested? ›- They take the time to understand your business. ...
- They are willing to invest both time and money. ...
- They offer constructive feedback. ...
- They are patient. ...
- They see potential in your company. ...
- They're excited about your product or service. ...
- They believe in your team.
If your company is early stage and has a valuation under $1M, don't ask for a $5M investment. The investor would be buying your company five times over, and he doesn't want it. If your valuation is around $1M, you can validly ask for $200K–$300K, and offer 20–30% of your company in exchange. Type of investor.
Do investors get their money back if the business fails? ›
Generally, investors will lose all of their money, unless a small portion of their investment is redeemed through the sale of any company assets.
What are the three golden rules for investors? ›Make sure you know things like the level of risk you're taking, the factors that might affect how your investment performs and how easy it is to get your money out when you need to. Before you invest, take time to do some research of your own – and never invest in a rush or in anything you don't fully understand.
How do small business investors get paid? ›The most common way to repay investors is through dividends. Dividends are payments made to shareholders out of a company's profits. They can be paid out in cash or in shares of stock, and they're typically paid out on a quarterly basis. Another way to repay investors is through share repurchases.
What are investors in start up companies called? ›While both provide money to startup companies, venture capitalists are typically professional investors who invest in a broad portfolio of new companies and provide hands-on guidance and leverage their professional networks to help the new firm.
How can I raise money for a small startup? ›Through websites like Kickstarter, Indiegogo or GoFundMe, crowdfunding enables business owners to raise money from many contributors. Crowdfunding can be a great way to attract investors for your startup and create a network of people who share your vision.
When your startup runs out of money? ›The best thing to do when you run out of money while running a startup is to raise more money. This can be done by either finding more investors or by generating more revenue. If you're running out of money, it's likely that your business isn't generating enough revenue to sustain itself.
Can you get funding without a business plan? ›Most commercial banks require a business plan as part of a loan application. A plan is also required for applying for a business loan guaranteed by the Small Business Administration (SBA). Everyone you talk to is going to expect you to have a business plan available.
Why do investors not like LLCs? ›Typically, venture capitalists (and sometimes angel investors) will not fund LLCs. There are several reasons for this. One is because an LLC is taxed as a partnership (pass-through taxation) and will complicate an investor's personal tax situation.
Do investors prefer LLC or corporation? ›Most venture funds and startup investors prefer C Corps due to the tax implications. Tech startups choosing between an LLC and a C Corporation will want to keep this in mind, as it may be difficult to raise capital for a business registered as an LLC.
What are investors in an LLC called? ›The term member refers to the individual(s) or entity(ies) holding a membership interest in a limited liability company. The members are the owners of an LLC, like shareholders are the owners of a corporation. Members do not own the LLC's property.
What is an angel deal? ›
An angel investment deal is a deal in which an investor (the angel) provides capital to a startup company in exchange for equity ownership in the company. The angel may also provide other resources to the company, such as mentorship or office space.
What percentage do angel investors want? ›One big disadvantage is that angel investors typically want 10% to 50% of your company in exchange for funding. That means business owners could lose control of their business if the angel investors determine they're keeping the company from succeeding.
Can I use investors money for personal use? ›Legal Use of Company Funds for Personal Purposes
It's not always illegal to use company funds for personal purposes. It is possible to use company funds for personal purposes, but doing so requires the following parties either authorize it or are not defrauded by it: Tax authorities (IRS, state government, etc.)
The best time to contact potential investors for your startup is when you have a solid business plan and a detailed understanding of your industry and target market. Before approaching investors, it's important to have a clear idea of what you need the money for and how much you're looking to raise.
How do you approach an investor to invest? ›Don't settle for the first person you find. Instead, identify the strongest possible connection and ask whether they'll make the introduction for you. If they're unable to, ask if they'll put you in touch with someone who can. “Talk to key industry players and persuade them of your viability.
What do you say to potential investors? ›Skip the small talk.
Instead, get into the main reasons for your conversation. Most investors want to know about your business and why it's great. They also want to know how your business will help them. In other words, they want to know what kind of return will they get for their investment in your business?
Investors will want to see information that indicates the current financial status of the business. Usually they will expect to see current reports such as a profit and loss statement, a balance sheet and a cash flow statement as well as projections for the next two or three years.
What investors look in a startup before investing? ›Investors want to know the size of the overall market and the total number of potential clients. The investor would hesitate to invest if the planned market size is insufficient since they might not receive sufficient profits. It must be remembered that the company should be sustained over the long term.