Raising capital for your emerging business may seem intimidating because funding opportunities are more diverse than ever. Learn the basics of angel investing, equity crowdfunding and seed funding, and discover how to choose the best one for your company.
Calling All Angels
Have you ever overheard someone say, "I wish I would have invested in Microsoft all those years ago; I'd be rich now!" As a new start-up owner, you know having someone like that offer to help fund your business would be the answer to your prayers. Angel investing does just that: it brings together people willing to take a chance on your passion and be a part of what it will become. Making money in the process is always an extra incentive.
Angel investors are individuals who recognize the potential of a company and choose to provide capital in exchange for a high ROI, usually through convertible debt or ownership equity. Although angel investors generally want a 10 percent or higher ROI, their selected company will benefit from acquiring a larger initial second-round investment from these individuals.
Angels tend to do their research, so it pays to impress them from the beginning. Richard Harroch, contributor to Forbes magazine, explains that angels search for companies with several qualities:
- Company founders with passion, commitment and integrity
- A clear, actionable business plan
- Market opportunity with great potential
- Viability to raise additional financing
To demonstrate these qualities, you should be able to provide potential angel investors with:
- An articulate elevator pitch
- An executive summary
- A prototype of your product or service
- Evidence of customers or early adopters
In addition to raising the funds you need, having angel investors on your side provides numerous benefits. William R. Kerr and Josh Lerner of Harvard Business School, and Antoinette Schoar of MIT, found that angel-funded firms are more likely to:
- Raise additional funding outside of the angel group
- Succeed over the long term
- Gain website traffic and site rankings
- Grow the business through additional business contacts and mentoring
How do you find these angels? Many people are now joining angel groups to quickly discover businesses that match their passions. A good place to start is the Angel Capital Association, which lists multiple angel groups and individuals.
Be a Part of the Winning Crowd
Your angels are great for second-round and subsequent funding, but you want to stand out when your business is in the initial stages or is developing a new product. Especially for millennials or the ultra-social crowd, equity crowdfunding may be worth the pursuit.
In equity crowdfunding, you're asking many people to donate to your business in exchange for equity. Small and growing businesses continually benefit from equity crowdfunding because otherwise unconnected people have a desire to connect to campaigns with a greater purpose. Half of the $2 billion invested through equity crowdfunding in the U.S. in 2015 went to start-ups, and that figure is expected to rise by 100 percent for 2016. Equity crowdfunding raises 40 times the revenue for small businesses than other types of crowdfunding.
Initially, the idea of asking many people to fund your business might seem like a hassle when you could get more money from a few individuals. However, the real payoff in crowdfunding is the increased potential for spreading your business across social media at lightning speed. Crowdsourcing attracts like-minded people who want to be a continuing part of your world. They may not have the ability to shell out hundreds of thousands of dollars like angels do, but their smaller financial contributions, often between $15,000 and $50,000, also lead to free marketing on all social networks. Just ask your bookkeeping services: building a network of future customers will support the success of your company.
Planting the Seed
Even if you've ever planted a garden, you know how seeds work. You plant the seed and take care of it by watering and feeding, and then it grows into the plant it was meant to be. Seed funding works the same way. When you need financing to start your business, you're in the "seed-stage." One mistake start-ups frequently make is confusing "early-stage" with seed-stage when seeking investors. Think of seed-stage as the very beginning: you're still planting the idea of your business. Early-stage, on the other hand, is when your business is starting out and has been recently established — a seedling rather than a seed. If you approach potential investors and ask for early-stage seed money before you've established any type of customer base, you'll lose the money before you get it.
Don't worry, since you have options with seed funding. You can try a donation-based crowdfunding campaign or look for an angel willing to invest at the seed stage, but keep in mind there are plenty of other opportunities.
- Micro-Venture Capital Firms invest institutional (rather than that of individuals) money at the seed-stage.
- Business Accelerators provide financing as well as workspace and mentoring.
- Some municipalities offer Startup Incubator funding for local businesses.
- Corporate Seed Funds are available from mature companies such as Google and Intel.
You know your business better than anyone, so use that knowledge to win over investors. Whether your business is in the seed-stage, newly established or ready for growth, impress investors with a clear and articulate plan. Choose the funding sources that match your needs and your growth stage for the best results. The money may only be a click away.
Whether you are an early stage startup or hitting your growth stage, remember that solid bookkeeping processes and procedures are key to successful growth.