Capital is key to the survival of a business. If a company lacks money and assets, it won’t survive. Knowing how to raise capital can help prevent this.
As an entrepreneur, your business plan requires you to identify your sources of funds. Here is a brief description of some of the common sources of capital and some suggestions on how to approach them.
Venture Capitalist Investors
Venture capitalists (VCs) should be at the top of your list when it comes to ideal sources of capital. VCs seek opportunities to invest in budding companies, so they can win big when their investment becomes successful. Since they risk their own assets, they expect large profits in return.
You must convince them that your project will be successful and that their investment will reap great rewards. You must also demonstrate that you have a strong team to back up your promises. If VCs see potential in your company, they may invest. And, if your company executes its business plan and distributes the return on investment (ROI) accordingly, you will be in a better position to attract new investors.
Investors who are fully invested in your company’s cause will not only be looking for ROI, but also for equity in your business, which means the people who are your source of capital will also be part owners. The amount of equity given to these investors will depend on how much they invest.
Bank Loans & Lenders
Creditors lend funds to your business with the expectation that you will return the funds, plus interest. This means that, at first, you will carry debt. Once the agreed payment date is met, the deal between the company and creditors is complete. Unlike venture capitalists, bank lenders have no equity in your firm.
Crowdfunding has been a popular option for start-ups. You pitch an idea for your business, then supporters invest in the campaign with the hope of obtaining your company’s products (and, perhaps, a t-shirt) as payment. If the project is successful, the return on investment is not as valuable as when the investor has equity in your company.
Angel investors tend to be people you know, including family and friends. They may be your primary investors at the beginning stages of your business. Their interest is in helping you get the company off the ground, so they tend to focus more on your characteristics as an entrepreneur than on the actual business and its progress. An extensive network of potential angel investors and a good reputation are critical here.
Sometimes you must inject your own funds into your company. It’s certainly a risk that will test your confidence in your business, but if you aren’t willing to gamble your own money, then perhaps you shouldn’t expect other people to gamble theirs.
Making the Pitch to Potential Investors
How do you convince people to fund your business? What are they looking for? Some criteria that successful investors look for in entrepreneurs and companies that they invest in include:
- A strong command of the product or industry
- Persistent leadership and the ability to work through hard times
- Compatibility between management the investor
The ethical and conceptual value of your company will determine its monetary value. Here are some questions to consider and traits to develop before you try to convince investors to finance your business.
- Is your company’s product or service relevant to its industry?
- Are you willing to persevere and make sacrifices for the benefit of your company?
- Are you a person who can treat colleagues with the respect they deserve?
Be sure you understand the requirements of each of your capital sources before you approach them with your proposal. If you can impress them with your pitch, you will have taken a huge step forward in growing your business.
Justin Tjoandi | Contributing Writer