Private investors are key for new businesses looking to raise start-up capital. Not only do private investments bring financial help to the entrepreneur, but often these investors can provide expertise and contacts that the new business may need in order to get to the next level.
The amount of investment from private investors varies greatly, as investors based in the US and overseas range from a variety of budgets and a variety of industry sectors. Many investors will look at their own interests, whether the idea is innovative in their minds, and often where the new business is located.
Some lenders prefer to invest locally, and so business location may be a factor. Many private investors congregate around the major cities in the United States such as San Francisco, LA, New York, Chicago and Seattle. However, with connections easier to maintain over long distances, online partnerships have been increasing so where your business is based may not be such an important factor any more. This can be beneficial since real estate costs and rent can be high in some of these premium locations.
3 benefits of finding a private investor for your business
Here's why you should consider linking with private investors for your small business.
1. More moolah
The most important reason is, of course, the money. If you don't need money, it probably isn't worth it to give up equity to a private small business investor. Just hire a consultant for the other benefits.
Private investors can fill your cash bucket and also act as a lead investor if you start trying to raise venture capital. And if your business is doing well, you may be able to seek more capital contributions in the future.
2. Mentorship and consulting
If you can find an investor who has walked the walk, their mentorship will be invaluable — especially if you're in the same industry.
All the pitfalls that the investor stumbled over, how they managed an ever-increasing workload, and all the incidents that required new internal controls can help your business now. Good investors will want to meet at least a few times per year to go over financials. Use that time to pick their brain.
You build a lot of connections over a long career — with customers, vendors, banks, insurance agents, and even accountants.
When you start your business, you have to start fresh with all of those people. If you can use your partner's connections to find a loan or get a new insurance policy, you'll likely save a ton of money and time.
The 3 types of personal investors for small business
When looking for investors for small business, there are a few types you'll come across.
1. Other business owners
A key goal for many entrepreneurs as they age is to get their business to the point where they can escape the daily grind. Eventually, they have executives to manage most departments and can cut back on the 80-hour weeks they've put in for decades.
Most of those entrepreneurs, however, have a hard time cutting back. If they've worked nonstop their whole life, what do they do when they stop?
That answer could be to invest in other businesses. Private investors can participate in a lot of the highs of owning and running a business without the grind.
2. Lead investors
Lead investors often start as angel investors. They invest in your business sometimes before you even have revenue and then go on to lead you through the fundraising process.
Lead investors are associated with the venture capital process, so you may not want to seek one out if you aren't in a high-tech, fast-growing industry.
3. Passive investors
Wealthy individuals who are bored by the stock market or the local real estate market will start to look into investing in small businesses. Though some of these investors are wealthy because they started a business, there will be some who inherited their wealth or earned it by holding a high-paying job for years.
These investors are great for sourcing cash but they may end up being passive — that is, someone who receives financial statements each year but doesn't take part in managing the business.
How to find personal investors for your small business
Here are some tips on how to find a private investor.
1. Talk to friends and family
When you're looking for private investors, your first stop ought to be friends and family. These are people who you already know so it will be easier to pitch to them and you won't have as much of a transitional period once the investment is made.
That means you may have to call up your father-in-law or reconnect with an old college roommate.
The drawback of using friends and family is that money can damage relationships. If you do go that route for an investment, try to keep the amount low or structure it in a way that you'll be able to pay it back over time even if the business doesn't work out.
2. Talk with your existing network
Your network is a version of friends and family, though it's more like acquaintances and connections. All of the people who you've added on social media or golfed with a couple of times could be potential investors.
If you think someone is a good prospect, set up a lunch with them to pick their brain first. If you go too fast and send an email asking for money, you'll end up getting ghosted a lot.
The better strategy is to spend time with the investor and offer something of value to them. For some people that could simply be a person to talk shop with. Eventually, you can talk about your business and your need for money.
It's a tough road to walk because the best way to get money is to not go into a relationship with that as the only goal. That type of attitude turns people off. You have to toe the line between developing a worthwhile relationship and eventually asking for money.
You also may end up using your network to get recommended to a potential investor. In that case, the meeting was set up for you to pitch your business so you should get to the point.
3. Get out and sell
The toughest way to find private investors is by getting out and making your case. In marketing, salespeople refer to the leads they receive as either warm or cold. A warm lead would be someone who has already expressed interest in the product and just needs help making the purchase.
A cold lead is a random email from someone who doesn't even know that you're going to call. If you've blown through your friends, family, acquaintances, and connections, you're going to have to try out some cold leads.
It will be a good test for the future success of your business. Small businesses sink or swim based on the salesmanship of the founder. You have to sell to customers, obviously, but you also have to sell to vendors that they should let you buy on credit, the bank that you should get a loan, and even employees that the company will be around in six months. If you can convince some random person to invest in your business, there's a good shot that your business will do well.
There's no secret formula to doing this. You have to go to conferences and meetings. Talk to people you see at business events that you don't know. Hit up the guy you did one transaction with three years ago. Talk to people in the grocery store if you have to.
Go private to go public
Private investors are the lifeline you need to get through the financial and mental roadblocks that are bound to come up. Spend the time to find a good one and if you do, keep the partnership going. If you find a good lead investor, your endgame could be an initial public offering.
Finding the right financing for your small business
Finding the right type of financing for your business means knowing what you need the money for and which lender makes the most sense for you to partner with. If you're starting a new business, a VC firm can give you the guidance you need to get off the ground. Alternative lenders are best for short-term, high-interest-rate loans for any type of business.
Regardless of the type of financing you need, the best way to find financing is through networking and connecting with investors of all types. Once you target a few, you can partner with the one that makes the most sense for your business.