I’ll answer the question upfront--WE WANT THEIR MONEY BACK PLUS SOME! This may seem like an obvious answer but many entrepreneurs forget the basic exchange between a business owner and an Investor. There are many types of Investors and they all have different return requirements. However, an Investor is NOT a Philanthropist. Philanthropists give money to causes to promote the welfare of others. Let’s start with the basics; the who, what, when, where, and how.
Friends, Family, (and sometimes Fools)
This is typically your easiest group of investors. They are mainly investing in you rather than your idea. You may be able to get a few thousand dollars towards your idea. These investors also require a return but likely will not require much (if any) equity or return. Advice do not give 50% equity for this investment. While this is critical capital, the equity in your venture is important. Small sums of investment for large stakes will do much more harm than good.
Who: An Angel Investor is generally individuals that invest their own capital into an entrepreneurial company. Angel investors are not necessarily millionaires. To be an accredited angel investor you must:
What: What Angels invest from an industry perspective is highly variable. Angels are generally seeking a greater return than they can get in the stock market.
When (company stage): Angel Investors generally are a source of seed capital. Seed capital is the first level of capital after you have tapped out your own means and the FFF pool described above. Companies in the seed phase generally are not revenue generating and are still in the product development, testing, or R&D stage.
How (much): Angels invest anywhere from $100,000- $1.5 million. Some Angels may invest micro-amounts from $10,000 to $50,000.
Where (is the exit): This is highly variable. Lots of Angels will issue convertible notes. Convertible notes are loans that may convert to equity. This means that the investor may exit early if you have the capital to pay the note (or in some cases the instrument will convert to equity mandatorily).
Venture Capitalists (VC)
Who: A Venture Capitalist is a person who invests in a business venture at either the start-up or the expansion phase. Lots of Venture Capitalists do not use their own money for investment but rather the funds are raised and pooled. The funds may come from wealthy individuals or institutions.
What: Venture Capitalists tend to have specific industries that they will make investments in. It is critical to first understand what the fund is interested in. Venture Capitalists are generally seeking HIGH GROWTH companies. These companies give the VC the greatest chance of hitting that 10x return or home run they are seeking. This may mean your main street business may not generate these types of return therefore are not of interest.
When (company stage): This can become murky. A VC can invest in companies that are early stage, growth stage, and later stage. Some portfolios will have a mix of all three. Early stage are those companies that are beyond the start-up phase and may be ready for a commercial release. A growth stage company is a company that is expanding or scaling up. A later stage company has grown through the commercial manufacturing and is likely preparing for an exit, possibly going public.
How (much): How much a fund is willing to invest generally depends on the size of the fund. For example, it would be unlikely that a small 20 million-dollar fund would invest $10 million into a single project. Conversely, a 200 million-dollar fund would like not invest only $1 or $2 million into a company. Get to know what the funds thresholds are and know whether the investment you seek is too large or too small for your target.
Where (is the exit): VC’s typically are going to hold an investment for 5-7 years, possibly longer.
There are several other types of investors. Understanding these basic groups will take you a long way on you search for capital. When seeking funding from an Angel or a Venture Source understand that the basics principles apply.
1. There has to be a clear method of generating a return. If it is not clear where the money will be made YOU ARE NOT READY FOR INVESTMENT.
2. There has to be an exit. Investors are not Founders, they do not want to be involved in the company for generations. If you are looking to build a legacy VC FUNDING IS NOT FOR YOU!
Always do your homework on your targets and be ready to speak to how you fit their profile.
Dr. Shante Williams is a serial entrepreneur who started slow and in the shallow end of the business pool. She has worked in Biotech, Big Pharma, Green Energy, and Academia