It can be a complex and draining experience to find investors for early-stage startups. It is also very much against the clock. The window of opportunity for scaling is small, and if you don’t grab that moment at the right time you can stall and then grind to a halt.
So how do you find investors at an early stage? And what exactly are you looking for?
“The best entrepreneurs are not the best visionaries. The greatest entrepreneurs are incredible salespeople. They know how to tell an amazing story that will convince talent and investors to join in on the journey.”
Alejandro Cremades, The Art of Startup Fundraising
Should we look for external capital?
There are pros and cons here, so it’s worth weighing these up before you opt for an external source of financing.
External funding offers one advantage over internal resources: you can use the internal funds and resources for other activities. It makes sense to opt for an investment with a higher return than the bank loan your business just got for example, and use external financing for operations.
One welcome benefit is the option to use external funding in order to fund growth projects. External funding can help you get the funding you need to build that expansion if, for instance, your company has grown to the point where you need more space to meet demand. External funding can also be used for making large capital equipment purchases to promote growth.
Expert advice can often be obtained from organisations providing finance for your business. A tech investor in your start-up would have a lot of tech insight to offer, and even if they don’t, they can help you figure out what you need to know.
And one possible disadvantage
You may have to give up some ownership of your company to get external financing from investors and shareholders. Although you may be able to get large cash influxes to launch your new product, part of the financing agreement gives investors a vote. This can derail the vision you started out with.
When considering external investment, it’s worth mulling over the above. At an early stage, for instance, you may be able to get started by bootstrapping rather than spending your time and energy looking to raise external funding. If anything, considering all options will make you more confident that you’re making the right decision.
What are the investment options?
There are quite a number actually. We will outline the most accessible possibilities here.
Business angels and investors
There are a range of investment companies that provide financing for startups. Once the business becomes profitable, they often take shares or agree to repayments with interest. Business loans are offered by some, but at lower rates compared to bank loans.
Often, investors focus on a specific industry or sector. These investors are more specialised and they can actually end up offering startups more attractive rates and terms. That is because they understand the sector better.
Investment trusts and Venture Capital Trusts
The stock market doesn’t allow private companies to directly sell shares to the public. You can raise money by giving up a stake in a business, though. Along with finding a business angel, you can also get funding from:
- Investment trusts can mean companies can get public funding indirectly. Using the money provided by their clients, the trust invests in a portfolio of companies.
- Venture capital trusts – these are listed on the stock exchange and work the same as investment trusts. It’s not quite the same thing though, because venture capital trusts (VCTs) provide funding to smaller, less established companies that need funding to expand.
An angel group is a small group of angel investors who meet regularly to evaluate and invest in startups. Each group can have its own unique rules. An angel group usually targets a specific area, typically a single region or city.
A group’s goal is to assemble members of similar backgrounds and interests who nonetheless can bring a variety of skills, expertise, and experiences. Angel groups typically invest in startups at the seed stage.
To get you started, here is a list of the most active groups in the UK:
- Minerva Business Angel Network
- Cambridge Angels
- Equity Gap
- Newable Ventures
- TRI Capital
- Kelvin Capital
How to find investors
One option is to look for an accelerator program. Most startup accelerators invite serious entrepreneurs to apply. If accepted, you will probably receive a small element of funding.to continue your work, as well as connections with other investors and advice on fundraising.
You could also try and attend some events (such as pitch nights) specifically created for entrepreneurs. Visibility in business is all about getting seen by the right investors, who you know and who knows you. You can do this by attending events. Be proactive in finding out who will be attending the event and schedule meetings in advance.
Finally, you could also go online, and find one of the many fundraising platforms that are currently operating. Individual investors, angel investors, and cash-rich banks and funds are all attracted to them. Peer-to-peer lending sites, debt and equity crowdfunding portals, and donation-based crowdfunding are the major platforms.
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