Starting a new business requires a substantial investment of both time and financial resources. While some entrepreneurs have enough financial resources to do this on their own, most new business people need to seek out others who are willing to invest in their business. From purchasing or leasing real estate, hiring a staff, or purchasing raw materials and equipment, the front end costs of a business can be huge and it can take a while before you start to see a profit.
To help business people who are just starting out, Forbes recently created a list of common mistakes small businesses make when seeking out investors. We have included some of Forbes‘ tips below, as well as some tips from the U.S. Small Business Administration (SBA).
SBA Tips for Securing Investors
You have to understand the difference between private equity, venture capital, and angel investing. There are lots of different types of investors, and if you do not understand the vocabulary you cannot understand what exactly it is that you are looking for. The first type of investment is called “private equity” or “PE.” Private equity includes many different investment types, but they are all usually made by private individuals or privately-owned institutions. If you are purchasing a company, funding a project for your company, or seeking just what we would traditionally think of as an investor, you might consider this type of investment. The second type of investment is called “venture capital.” This type of investment is similar to private equity, but it usually involves an investor investing a very large amount of money in a startup that has a high potential for profitability. Venture capitalists usually do not only provide funding–they also usually bring business expertise to the partnership and provide valuable advice to the start-up. The third and final type of investing is “angel investing.” These investors usually invest in startups and the investors usually have a high net worth and are seeking high returns. They usually do not invest as much as a venture capitalist.
You should consider government venture capital programs. One such option is the Small Business Investment Company Program (SBIC). The SBA does not directly invest in businesses through this program. Instead, SBICs are privately owned and managed funds that use a combination of private funds and funds borrowed from the SBA to fund business.
You need to know where to look for potential investors. There are three main places the SBA suggests you look for potential investors. These include (1) the local business community, (2) trade associations associated with your industry, and (4) any state or local economic development agencies.
Additional Tips from Forbes
Once you find a potential investor, you want to make sure you make the best pitch possible. These are just a few of the tips provided by Forbes in its report:
Do not give your potential investor a 50-page business plan to review up front. The investor likely does not have time to look at huge reports for every company that needs an investment. Instead you can give them a brief summary up front, and once you have a meeting, then you can provide the more detailed report.
Once you get a pitch meeting, do not do all of the talking. Instead, bring key members of your team and let them talk about what they will add to the business, so the investor can see that you have good people working with you.
Understand the risks to your business and be able to address them. This can include legal risks, regulatory risks, technological risks, product liability risks, or others.
Be able to explain how your product, technology, or services is different from that of your competitors. You need to be able to show knowledge of your competition and explain why what you are offering will be better.
Explain a marketing strategy. Your product or service may be the greatest thing ever created, but if you do not know how to sell it to consumers, it is worthless to an investor. You need to be able to explain how you are going to obtain customers in a cost-effective way.
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