How to find investors for your small business

If you’re like nearly all early-stage entrepreneurs, you’re spending the majority of your time exploring ways to help get your business off the ground. Using funds from investors can be a great way to jump-start your operations so you can take your company to the next level. And if your business is already up and running, investors can provide a jolt of cash to help it grow. When exploring outside sources of funding, it’s important to differentiate all the different types of investors you can work with. What’s the best option for you? It depends on your specific business goals. Learn more about how to find investors for your small business and what to consider before you accept investor money. 

What you’ll learn:

• Working with investors typically means giving up some level of equity and control over your company, but it can give you the funds needed to achieve your business goals.

• Some ways to find investors include crowdfunding, tapping into your community, working with venture capitalists (VCs) or angel investors and considering incubator or accelerator programs.

• Investors want to know they’ll receive a healthy return on their investment, which can be shown through a solid business plan and proven financial performance.

If your company needs a financial boost, you might turn to outside investors for help. To attract them, you’ll need to demonstrate that they’ll receive a return on their investment. However, not all investors look for the same things. For example, certain types of investors might be interested in a unique business idea. Others are seeking a proven success or proof of concept. In general, here’s what the majority of investors are looking for in a company:

• A comprehensive business plan: Investors want to see that you have a vision. That means having a clear business plan with a solid go-to-market strategy. Showing data and hard numerical figures can build your case and give investors more confidence in your company, convincing them that their investment will pay off.

• Proven market demand: Potential investors are looking at more than the uniqueness of your product or service. They also want to know that there’s enough room in the market for your company to be successful. Highlighting your market opportunity with data and telling a compelling story about your business’s unique positioning can help convince investors to partner with you.

• Financial performance indicators: If your company is already in operation, investors will want to see how well you’ve been performing. You can demonstrate this by providing financial statements, like your balance sheet, cash flow statement and income statement. You might show potential investors other information too, like churn rate or the revenue per employee.

• Return on investment (ROI) potential: You can attract investors by proving to them that they can expect a strong return on their investment. That could mean having a solid business plan or showing you’ve got a clear edge in the market. But it’s not just about potential profits. You also want to show that your business is at the right stage for investment and structured in a way that makes it easy for investors to get on board.

Using investors to fund your business is a form of what’s known as equity financing. This involves raising capital by selling ownership shares in your company. There are several types of investors, and the right option for you can depend on your business model and how the investment is structured. Here are a few investor funding options you might consider.

As the name suggests, crowdfunding raises money from crowds of people—sometimes referred to as backers—to help with the costs of launching and growing a business. There are different types of crowdfunding and platforms you can use, depending on your business goals. Some types of crowdfunding offer rewards or gifts in exchange for capital. Others rely on donations. But with equity-based crowdfunding, backers—or investors—give you capital in exchange for a share of ownership in your business.

It’s important to note that with crowdfunding, there can be platform fees that eat into the total capital raised. And certain campaigns are run on an all-or-nothing basis, meaning you can’t keep any of the money raised if you don’t meet your full funding goal.

If you’re starting a small business, you might turn to friends and family members to invest in your company. This can be a common funding method, especially when you’re in the early stages. Having friends and family members invest in your company is similar to crowdfunding, but it typically doesn’t involve an online platform to raise money. Plus, it’s usually a lot more casual than crowdfunding—as you might not have to offer rewards or gifts in exchange for equity.

If you’re thinking about asking friends and family members to invest in your business, keep in mind that even though you probably have a more relaxed relationship with them, it’s still important to set clear boundaries and expectations from the start. For example, you might want to write up a formal contract that outlines repayment terms or how ownership in the business works. Doing this helps protect your personal relationship in case anything goes wrong with the business.

VCs are private equity investors who provide funding to businesses with a lot of growth potential in exchange for a share of the company. VCs typically work with businesses that are too risky to get traditional funding. Due to this, VCs usually want a bigger chunk of the company, as well as some control to ensure they see a good ROI. For example, in addition to asking for a significant percentage of equity, a VC firm might also want a seat on your company’s board of directors. 

VC firms are typically backed by insurance companies, corporate pension funds, foundations and other high-net-worth organizations. You can typically find them online or through word of mouth. There’s also corporate venture capital (CVC), which works a lot like traditional VCs, except with an added focus on making sure the investment aligns with the company’s overall strategy—not just profits.

An angel investor is someone who puts their own money into early-stage businesses—typically in exchange for an ownership stake in the company. Since startups often have unproven business models, they can be a risky investment—so angel investors typically want equity and may want a seat on the board. Some like to be more involved in shaping the product or service, while others take a more hands-off approach.

But unlike VCs, angel investors focus more on the overall company picture and helping it succeed, rather than profitability. That may be due to the fact that they use their own money instead of drawing from a pool of funds from multiple investors. Angel investors can be found through specific groups and networks, but friends and family members or crowdfunding can also serve as a form of angel investors.

An incubator is a structured program designed to help entrepreneurs grow their businesses by offering mentorship, resources and networking opportunities. While incubators don’t typically invest directly in companies, they can connect you with potential investors and other valuable contacts to help you launch or expand your business. Joining an incubator program usually involves a few steps, like submitting an application, sharing your business plan and possibly completing an interview or presentation. If you’re accepted, you’ll usually have to commit to the program for a set amount of time and take part in training sessions or workshops.

Incubator programs can be found in a variety of places, including:

• Online

• Certain colleges and universities

• Local incubators

• Nonprofits or government agencies

• Industry-specific firms

• Venture capital firms  

A business accelerator is a program that helps companies grow by providing resources, business coaching and access to the accelerator’s network of contacts. These programs are usually meant for businesses that already have some traction, like a “minimum viable product”—a basic version of your product that early customers can use. Entrepreneurs can apply for entry to an accelerator program, and if accepted, they’ll go through a focused program that usually lasts three to six months and is packed with mentorship and business support, all designed to help take the business to the next level.

Unlike incubators, accelerator programs can directly provide funding in exchange for equity. And at the end of the program, business owners can pitch their company to investors and maintain contact with them for future opportunities.

Depending on your location, you might be able to partner with investors close to home. Certain cities and towns offer programs and initiatives to help local business owners start or grow a company. Local business owners and community members may be able to point you in the right direction when seeking different funding options. And there might be organizations within your region that can connect you with potential investors and other resources to get your name out there.

Growth equity is an investment arrangement where companies trade some ownership for capital. It’s typically offered by investment funds, private equity firms and late-stage venture capital firms. This type of investment targets more mature companies that are on the verge of rapid growth. Compared to traditional VCs, growth equity investors focus on companies with lower risk, which means they generally expect less equity in return.

If your business is further along, you might consider raising money through an initial public offering (IPO). That’s when you sell shares of your private company to public investors—who become stockholders—for the first time on a stock exchange. This is a major step for businesses because it means transitioning from private to public ownership. With an IPO, you can usually bring in a large amount of capital to help take your business to the next level or pay off business debt. But it’s not a quick or simple process—it takes time, planning and quite a few steps before you can officially go public.

While it might be tempting to use investor funds to help get the ball rolling, the first offer you get might not be the best option for your business. There are a few considerations to keep in mind before accepting investor money, such as:

• Is my business investor-ready? You need more than a solid idea. It’s just as important to carefully think through the different stages of growth for your business. You’ll also need to consider the timing—are you at the right stage to accept outside funding? Raising investment funds too early might mean giving up more ownership than you’re comfortable with in the long term. It could also result in an overly complex business structure.

• What are the alternatives for funding? Investor money isn’t the only way to fund your business. Instead, you might consider an SBA loan or a business credit card to access funds that can help you expand. 

• Is this the right investor? Different investors have varying expectations, structures and available resources. Suppose you’re looking for mentorship and guidance in addition to investment funds. In this case, you wouldn’t want to accept funds from an investor who’s more hands-off and focused solely on profits, which is generally the case with the VC structure.

• How much equity can I give up? Figuring out how much ownership you’re willing to give up is critical when deciding whether to work with an investor. Some investors might want a significant amount of equity and control in the company. This could limit your ability to make certain decisions for your business.

Finding the right investor for your business can mean more than just financial support—it can also come with valuable guidance and mentorship. But keep in mind that teaming up with an investor usually means giving up some control over your company before you’re offered any money. If you’re looking for a more flexible way to access funds, you might consider using a business credit card. Check out business credit cards from Capital One and get pre-approved today—without impacting your credit.