Are you looking to raise equity for your business, and not sure who to talk to? Hi, I’m Riley Rogers, and we’re going to talk about three different types of equity investors and where you might find them and what they might be looking for.
What is “selling equity” in your business? It means you’re offering some percentage of the shares of your business in exchange for capital. And to do this, you might be raising capital to get started, you might be raising capital to grow your business. The first thing you need to do is look at the size of the financing need and understand that different investors come in at different stages.
$25,000 – 50,000: Friends, Family, Savings
If you’re raising less than $25-$50,000, generally speaking you’d be finding equity from friends and family, personal savings, and cofounders. You’d be using these different sources to finance that small equity need in your business to get you going.
$50,000 – $500,000: Angel Investors
If you’re trying to finance about $50,000 and you’re looking at a need ranging from $50-$100,000 dollars up to close to a half million dollars, generally speaking you be talking about raising capital from angel investors. According to the SEC, accredited investors or as they’re known in the startup world, “Angels”, are people with a minimum income of $200,000 or a million-dollar net worth. What they’re able to do is invest in private market securities which are startups and small businesses aren’t publicly listed on a stock exchange. These Angel Investors frequently gather in groups and find startup opportunities to invest their own capital in the companies to get them going.
Angel investors are taking a very high risk; therefore, they’re looking for high return. It might only be focused on high-tech or high-growth businesses, meaning Angel Investors, even though it might fulfill your financing needs, might not be an option for your business.
$500,000 – Millions: Venture Capital Firms
If you’re looking to raise over half a million dollars or upwards of several million dollars in equity for your start up a small business, you’re most likely going to need to target venture capital firms. These are institutional investors who have pooled capital together through limited partners for LPs and have a targeted investment criteria and types of businesses they’re going to go out and seek.
These types of opportunities are also high-risk, high-growth companies to generate a return that’s significant enough for the amount of risk that these investors are taking. Venture capital funds generally will invest in C stage deals which could be half a million dollars up to a couple million dollars, or series A deals, which on the low end could be a couple million dollars up to $10 or $15 million. These equity options are typically available to a tiny fraction of startups; less than 1%.
When venture capitalists are evaluating companies, they are looking at many different criteria and looking at many opportunities, so you need to make sure your business is a fit for venture capital and understand that in many cases you will have to find another financing need to grow your business.
Showing Traction For Angel Investors & Venture Capitalists
If you’re out raising capital from Angel Investors, you want to also be able to show traction in your business. You want to be able to show that your business will succeed. You can do this showing that you’ve been generating revenue, you’ve been generating recurring revenue, and that you’ve had a lot of engagement from your customers and your audience. This shows that you’re less risk relative to other startups who haven’t been able to prove out this traction.
The same idea goes for venture capital firms: they’re trying to mitigate risk while also being able to have a significant upside in their investments. If you’re able to show significant traction when you go out for a seed round or a series A, you can prove to investors that your business is going to succeed and that they have the opportunity to be part of that growth and that success.
Key Takeaways For Equity Financing
If your financing your business through equity, there’s a few things you need to understand. First, not all investors invest in all different types of companies. Second, there are different types of securities to use; some which are beneficial, and some which could pose problems or threats to your business. It’s best to consult with an attorney if you’re going to be raising equity in your business.
Target Different Investors
Depending on the financing need, if it’s a small as a couple thousand dollars, all the way up to if you’re trying to raise several million dollars in equity, there are different investors to target. It is important to understand what types of transactions those investors invest in, and what sectors, or verticals, that they are focused on. It’s important to target investors based on not only the stage of your business, but the size of the investment you are looking for, and the industry or vertical that you’re operating in.
Another important thing to understand for startups is that equity investing and equity investments may be the only option for asset-light early-stage companies who can’t get bank financing or some of the alternative sources of financing. Though sometimes this is the only way to get your business off the ground.
How to Target Angel Investors for Your Business
If you’re going to be going out and targeting Angel Investors there’s a few different ways you can do so. The easiest way is that most major cities there are organized Angel groups where accredited investors gather frequently on a monthly basis to review startup investment opportunities. This is a great way to go get yourself and your business in front of potential investors. To do this, you need to put together a compelling presentation or a pitch deck to highlight all the different pieces of your business, and find a way to get an opportunity to present. If you’re able to do this, you need to focus on the fact that you can offer a high potential return for this high-risk investment.
Another way to find early-stage investors or Angel Investors is through online platforms. AngelList, Gust, Circle Up, Onevest and many others offer online communities of Angel investors actively raise capital and target different investors for your company. If you do this, you’ll still need to develop a compelling presentation, financial information, and other details that are relevant to raising capital and financing your business.
While you’re going out raising capital from angel investors, it’s still important to understand the different types of securities and options that are available. There’s a big difference between raising convertible debt or priced equity, and it’s best to consult with an attorney if you’re considering both of those options.
About Riley Rodgers
Riley Rodgers is an Associate at Arctaris Capital Partners, the founder of Crash Alert, and a SCORE Mentor. He has mentored more than 100 start-ups and small businesses through SCORE and reviewed hundreds of deals through Arctaris. While at Arctaris, Riley has sourced and executed several deals and raised capital through investment advisory projects. He is also a board member and mentor for multiple non-profits in New England, and enjoys helping companies solve a wide range of problems. His primary focus while working with companies and entrepreneurs is to help with strategy, raising capital, and marketing. He is a frequent speaker, judge and contributor throughout the greater Boston ecosystem.