Where you look for money, and how you look for money, depends on your company and the kind of money you need. There is an enormous difference, for example, between a high-growth internet-related company looking for second-round venture funding and a local retail store looking to finance a second location.
In the following sections of this article, we’ll explore six different types of investment and lending options. This should help you determine which funding options are viable for your business and which investment options you should pursue first.
1. Venture capital
The business of venture capital is frequently misunderstood. Many startup companies complain about venture capital companies failing to invest in new or risky ventures.
People talk about venture capitalists as sharks, because of their supposedly predatory business practices, or sheep, because they supposedly think like a flock, all wanting the same kinds of deals.
This is not the case. The people we call venture capitalists are business people who are charged with investing other people’s money. They have a professional responsibility to reduce risk as much as possible. They should not take more risk than is absolutely necessary to produce the risk/return ratios that the sources of their capital ask of them.
Who should pitch to venture capitalists?
Venture capital shouldn’t be thought of as a source of funding for any but a very few exceptional startup businesses. They can’t afford to invest in startups unless there is a rare combination of product opportunity, market opportunity, and proven management.
Venture capital professionals look for businesses that they believe could produce a huge increase in business value within just a few years. They know that most of these high-risk ventures fail, so the winners have to win big enough to pay for all the losers.
Typically, they focus on newer products and markets that can reasonably project increasing sales by huge multiples over a short period of time. They try to work only with proven management teams who have dealt with successful startups in the past.
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If you are a potential venture capital investment, you probably know it already. You have management team members who have been through that already. You can convince yourself and a room full of intelligent people that your company can grow ten times over in three years.
If you have to ask whether your new company is a possible venture capital opportunity, it probably isn’t. People in new growth industries, multimedia communications, biotechnology, or the far reaches of high-technology products, generally know about venture capital and venture capital opportunities.
2. Angel investment
Angel investment is much more common than venture capital and usually is far more available to startups, and at earlier growth stages too.
Although angel investment is a lot like venture capital (and is often confused with it), there are important distinctions. First, angel investors are groups or individuals who invest their own money. Second, angel investors tend to invest in companies at earlier stages of growth, while venture capital typically waits until after a few years of growth, after startups have more history.
Businesses that land venture capital typically do so as they grow and mature after having started with angel investment first. Like venture capitalists, angel investors normally focus on high-growth companies at early stages of development. Don’t think of them for funding for established, stable, low-growth businesses.
You should also be aware that angel investment was affected by the 2012 JOBS Act that loosened some restrictions and allowed what we now call crowdfunding. Traditionally, angel investment was limited by U.S. securities and exchange regulations to individuals meeting some minimum wealth requirements, called “accredited investors” in the legal wording. Crowdfunding is the accepted term for individual investment in startups by people who don’t meet the legal wealth requirements.
