Starting your own business isn’t easy. In addition to all the effort required to get your business ready to take customers, it’s expensive. Even the smallest business can require an exorbitant amount of startup cash, and that’s why most businesses have investors of one kind or another. An investor is almost anyone, a company or an individual, with money to spare, and they might be willing give you some to get your business off the ground if they think it has the potential to become profitable in three to five years. When looking for investors for your business, you basically have four choices, but they are not equal. Some have more rules and restrictions than others, and some are only available to certain types of businesses or are difficult to find. But as always, it’s easier to find what you’re after if you know what you’re looking for.
The first level of potential investors are the easiest to find, and available to almost everybody. Investment bankers often jokingly refer to this category as FFF: Friends, Family and Fools. This includes everyone you personally know and their networks of contacts, as well as anybody you can convince to contribute to your dream. But unless your family happens to be fabulously wealthy, this category yields the smallest amount of capital, usually accounting for no more than a few hundred thousand dollars. The FFF investors typically provide a base to get your business started while you seek out additional financial support. The next stop on the hunt for investors is the traditional bank loan. These can be more difficult to obtain because banks tend to be very cautious about their lending. They want proof on paper that your business is a solid investment, and if your company is so new it doesn’t have any operating history, no credit rating and no significant collateral, most bankers will politely refuse your loan. Banks can rarely be convinced to part with more than a few hundred thousand dollars for a small startup company. Venture capitalists are another option, as they tend to go looking for early stage businesses that are unable to secure a bank loan.
A venture capitalist is usually an individual or group that manages and invests a pool of funds from several different corporations. They tend to be attracted to high risk, high potential companies, typically in the technology industries. But if your company is too small, or doesn’t promise a huge future payday in public trading, it can be difficult to get their attention. Venture capitalism is really the big kids’ table of finance—they usually don’t play for less than a few million.
There used to be a treacherous chasm between the bank loan and venture capital, into which a great many small businesses fell and failed. If your business should tumble into gap, you have one more option: pray for an angel. Not the spiritual servant, but the financial saviors of many small startup businesses. Angel investors are wealthy individuals, typically retired entrepreneurs or executives, who invest their own money into high risk startups. The term “angel” was originally used on Broadway to refer to wealthy patrons who funded theatrical productions. Unlike venture capitalists, angels often have reasons beyond pure monetary gain for investing in a particular company. Though they favor businesses with high potential yields, they tend to invest in businesses that are of personal interest to them. Sometimes it’s just to keep active in retirement, or to stay current in their chosen field. Some angels simply enjoy helping young businesses succeed. In addition to startup funds, angels can come with many other benefits, like sage management advice and a network of valuable contacts. With an angel, you get more than an investor—you also get a mentor. There is now an entire community of angel investors out there, looking for places to put their extra cash. If your business is too risky for the banks, but too small for the venture capitalists, you need an angel.
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