If you have a great idea, you need money to get that dream off the ground. Securing financing might seem like an impossible task, but there are alternative ways to find the backing for your startup or small business. Private investors can help with financial matters while you work to build your company. Here is everything you need to know about private investors for your startup.
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What Is a Private Investor?
A private investor can be an individual or a company. They take their own money and invest it into your startup to get a return on investment for their efforts. Remember that this financial help comes from sources that focus on investment, such as an angel investor or venture capital firm.
There are four types of private investors: family and friends, angel investors, venture capitalists, and private equity firms.
In many cases, a startup owner first asks family and friends for financial help. They can assist with the funding. Startup owners already have relationships with these individuals and don’t have to build a foundation from scratch like private investors.
The next type of investor is called an angel investor. These individuals are wealthy investors who want to invest early in a startup. In some cases, these angel investors will pool their money with other individuals to form an investor pool. A typical angel investor often has a net worth of over $1 million. These investors use their own money, not invested capital, to fund the startup, hoping it will be successful.
Venture capitalists are next on the list. These individuals are just regular people willing to make a big bet on an investment opportunity, like a startup business. However, these individuals will work for a venture capital firm. Unlike those angel investors, they are not investing their own money but the firm’s money.
Finally, there are private equity firms. This type of financing is not associated with startup capital but the growth capital. It is reserved exclusively for those companies who want to grow to a bigger size or need an exit strategy. For those startups with an idea, a private equity firm is not suitable for this stage. These financial options are for those companies that need a large sum of money and have assets to leverage.
How Does Private Investment Work?
It can be difficult to navigate the early stages of private investment. Asking friends and family can be a challenge. You already have a personal relationship, but it is essential to treat them like any other type of investor. For that reason, create a written contract stipulating the investment terms and let them know that they could lose the money. Many people don’t want to ask their friends or loved ones for money since it can cause a rift in those relationships. That is why it is vital to seek outside sources of financial backing.
Angel investors will put up a small amount of money, ranging from a few thousand to a million dollars. These investors are an accessible form of early-stage capital for a startup. Some angels will invest periodically, offering a small sum with a follow-up later. You will want to structure the investment terms that are beneficial for you and the angel.
Related: 5 Best Startup Funding Sources
These investors will either have an equity stake or convertible note in the company. With an equity stake, the angel gives you money in exchange for company ownership. If the investor and startup owners cannot agree on the company’s valuation, then a convertible note is issued. The convertible note is similar to a loan. When the company’s value has been established, the angel investor can ask for their money back or get equity in the startup.
Before you sign any paperwork, make sure that a lawyer reviews all terms and conditions. You don’t want to agree and then lose half the company to an angel investor.
Venture capitalists have raised a large sum of money to invest. While they have a considerable amount of money, they only make small investments. In most cases, these capitalists only make a few investments per year. Only a few lucky startups will receive a big check from these types of investors.
Advantages and Disadvantages of Working With Private Investors
No matter your business, it can be challenging to raise capital. Unfortunately, it is a long and demoralizing process that can end with no payout. Many startup owners spend a reasonable amount of time looking for financing. Raising capital is vital for a business. Without money, they are not likely to get the startup off the ground.
Related: Angel Investors: Role & Function in Startups
Startup owners need to get capital from various sources, including private investors and financial institutions. Financing with a private investor can be advantageous since you can access money that is not typically loaned from a bank. However, you might be giving away ownership or other stakes in your company for that money. You need to weigh your risks and benefits before seeking a private investor. In most cases, it makes sense, but remember that each startup is different with various financial needs.
Where To Find Private Investors
Finding a private investor can be another challenge. With friends and family, you already know where to locate them. You can seek out an angel investor throughout your own network. Personal connections can help to connect a startup with an interested investor. Venture capitalists often work throughout their own professional network to find investment opportunities. They rely on trusted individuals to help get deals for their investments.
After finding a private investor, it is up to the startup owners to present a business plan, income statement, and financial analysis to secure funding. Remember, the goal of finding an investor is not to close the deal but to build a relationship.
Related: Business Startup Costs & Tax Deductions
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Private Investors Can Help Fund Your Startup
With any startup, you need money for operations and other matters. Without that, you will struggle to financially support your business. You need to find a way to take the financial burden off your shoulders. Along with traditional loans, private investors are another way to start down the path of a successful startup.
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