Debt financing is when you take on someone else’s money in exchange for interest paid throughout the duration of the loan. Equity financing is when you take on someone else’s money in exchange for some ownership of your company.
Two popular forms of equity financing are VCs, or venture capitalists, and angel investors. If you’re thinking “I’ve heard of those and want in,” ask yourself these questions first:
• Are you ready to share control of your company?
VC firms and angel investors can provide capital, guidance, and a big network of important people, but you may have to give up partial control of your company.
• Is your company the type of business that equity financing would work well for?
VCs and angel investors are looking for generous returns on their investment in a short amount of time. If you’re a slow growth company or aren’t focused on how you will scale, this is not the way to go. Venture capital funding in particular is best for companies who already have proof of concept and a management team with a proven track record.
• What stage or development is your business in?
If you answered “yes” to the previous two questions, ask yourself this. A startup that’s just getting off the ground, or trying to get from business plan to proof-of-concept, will want to focus on angel investors. Many angel investors will even want to see that you’re selling already. Venture capitalists will almost always want to see that you’ve proven that your product or service is something people want.
• Do you have your documents in order?
If you’re a brand new company, you’ll need a sound business plan and financial forecast that’s based on industry averages or larger companies related to your business. If you’re already in business, you’ll need additional documents like your financial statements from your previous months/years in business.
Angel investors can simply be a source of funds, or they can be a source of funds, advice and expertise. Both types can be found online or offline.
Offline investors would likely be wealthy individuals in your area or that you are somehow connected with. Ask your friends or other business owners if they know of any angels that work with businesses like yours. Angels will do their research on your business, so you’ll need to research them as well — if you’re a medical device company, for example, don’t target angel investors that are exclusively interested in retail.
Online investment platforms are another option for finding angel investors. Sites like OneVest, FundersClub, and Seedrs connect investors to small businesses. This is a good option if your business is ripe for investment but you don’t have the personal network to make it happen. These sites and the investors that use them are generally looking for early-stage companies with experienced leadership teams that have already demonstrated traction.