Ask SCORE: What Type of Investments are Available for My Business?
SCORE Bucks County works with financial experts such as Jerry Gepner to teach business owners and entrepreneurs the best business practices.
Finding the best funding strategy for your startup or early-stage business can be challenging. Investment opportunities are plentiful, particularly for technology-centric companies, but knowing what works best takes time, research, and a willingness to learn about the various types of investments and investors.
My 100,000-foot overview of private investing is designed to provide entrepreneurs with an appreciation of what the investment landscape generally looks like.
Perhaps the most important concept for entrepreneurs to understand is that early-stage investors are putting their money on you. Yes, you must have a good idea, but that alone is not enough. Investors are investing in – and hoping to capitalize on – the belief that you can pull it off.
I liken private investing to rungs on a ladder. The first investment rung for many entrepreneurs is friends and family. At this point, the business may be only a bit more than a concept, likely is not generating much revenue, and often not profitable. Entrepreneurs are probably operating out of their house and doing things needed to start to realize their dream. Investment from friends or family members is a good first route because they tend to be more patient with respect to a return on their investment. Nonetheless, they are real investors in your business and should be treated as such with respect to documentation of their investment and the rights or obligations that come with it.
Beyond family and friends, the next logical step that I see most often is that of angel investors. Angel investors can invest anywhere from $10,000 to $500,000. Angels are often entrepreneurs or executives who have been successful and are looking for opportunities to help new entrepreneurs while generating a good return on their investments. Entrepreneurs generally don’t need to be as sophisticated as they would when talking to later-stage investors, thus the name “angel.” Angel investors are usually closely involved with the business and focused on bringing strategic value and startup guidance.
Regardless of the investment type, investors generally provide funding in exchange for shares or equity in your company. That’s why the number one rule in funding your business is that the earliest money you raise is the most expensive you will ever raise.
The next investment rung is often ventured capital. Venture capital is typically for companies that have proven the business concept and started to scale but often have not yet turned a profit. Venture capitalists, by definition, take big risks – and expect big returns. Typically, venture capitalists hope to turn or exit their investment within three to five years, many times selling their shares to the next investor. Like angels, venture investors are often successful entrepreneurs and can often provide a lot of strategic guidance and support to a new company.
Private equity investing is the next rung. This community generally offers much bigger investments for a longer time frame. Private equity firms usually hold their investment for a longer term as your company grows, sometimes providing additional investment along the way. Both venture and private equity firms tend to be market or even product-specific, which is why it’s important to find one whose expertise and interests align with your business and can add real strategic value.
I cannot state enough how important it is for entrepreneurs to do their homework before heading down the private investment route.
Learn more about these types of investments at score.org.
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