“Angel investors,” venture capitalists, buyers, funding, lender financing, strategic alliances, technology transfer, merger/acquisition, start-up, turnaround assistance…all of these terms have one thing in common: On one end of the equation, someone is looking for money. On the other end, someone is looking for a good investment. The big question is: How can you, the burgeoning entrepreneurial consultant, get the right parties together at the right time? In this article, I’ve gathered resources that will help you get started on that winning business plan, find the right investor, and apply for funding on the Internet.
Write a solid business plan
As an entrepreneur with a great business idea, a business plan should be the first thing on your mind. Without a doubt, the business plan is the single most important written document in the early stages of a firm.
Successful business plans convey your ideas, research, and plans to others in a succinct way. Accel Partners—a national venture capital firm headquartered in Palo Alto, CA—notes that the longer the business plan, the less likely it is to get funding. The plan should contain the business concept, the marketing, production and technology elements, the backgrounds of the principal founders, and how much money will be required.
Numerous sites on the Web offer advice about how to put a successful business plan together. Check out the Accel site, BizOffice, Bplans.com, or BusinessFinance.com—which has a “Raining Money Funding Workbook” available to download. It’s a step-by-step guide to creating, supporting, and presenting your funding request.
Where should you go for financing?
According to PricewaterhouseCoopers, there are approximately 600 venture capital companies in the United States that manage about $40 billion, yet they only provide about three percent of all business financing in the nation. Another category of investors, called “angel investors,” is estimated to be 50 times the size of the venture capital industry. Banks lead the pack, lending more than $170 billion to small businesses annually. Add additional funding sources such as independent, non-bank lenders, and the picture can get really confusing to the little guy with that big idea.
There is no road map to finding financing. Even the experts agree that it is confusing, frustrating, and a real deterrent to small-business entrepreneurs who go looking for capital. In fact, most small businesses are started with credit cards and personal loans. Hence the question: Which way do you go—lenders or investors?
In reality, the two groups tend to look at transactions from very different perspectives. Lenders are mostly concerned with whether the borrower can repay the money, while investors are more interested in how far an entrepreneur can take a business idea. Ask yourself what approach you would want your financial partner to take, because chances are, they will be with you a very long time—typically five to 10 years.
Find the right partner
Professional investors operate under the “2-6-2 Rule,” which states that 20 percent of investments will be winners, 60 percent will be low-producers, and 20 percent will cease to exist. Those winners will pay for the remaining 80 percent and still show a return on the total investment, so that justifies taking the risk.
Venture capitalists usually get preferred stock in your company and make staged investments as the company meets clearly defined and obtainable milestones set forth in the business agreement. Venture capitalists also have rights that come with their investment, such as the right to elect one or more directors to the company’s board of directors and the right to receive various reports, financial statements, and related information.
Angel investors, on the other hand, fund about 50,000 of the estimated 300,000-plus small-business start-ups in the United States. They tend to offer “patient” money, which means you’ll have more time to let your business grow without the typical pressure that comes with venture capital. Typically, their range of investment is anywhere from $10,000 to $500,000.
According to AllBusiness.com, an online resource for the small-business community, investors are looking for:
- A strong management team with relevant experience.
- A substantial and rapidly growing market.
- A unique product that offers benefits over existing products.
- An IPO candidate or acquisition target.
- A sound business plan.
- Significant gross profit margins of 40 percent or more.
The best way to get your business plan in front of an investor is by way of an introduction. Venture capitalists and angel investors are likely to be more receptive to a proposal forwarded by someone they know and respect. Convince your lawyer, colleague, or accountant to send over your business plan or make an introduction.
Finding funding on the Web
The Internet is also helping entrepreneurs find new-business funding. Here are a few standouts:
- The Small Business Administration (SBA) is one of the best sources for locating funding for a new business. SBA does a lot of the legwork through its member lending organizations by holding workshops and helping entrepreneurs pursue a vast array of funding options. Although there is no legislated legal limit to the total amount of the loan that you can request, the maximum amount the SBA will guarantee is $750,000. You can be approved within 36 hours of completing an application, and repayment of the loan largely depends on your ability to pay and the term of the loan—usually five to 10 years for a standard SBA loan and up to 25 years for a fixed-asset loan.
- UniversityAngels.com operates under the premise that a good bet for the entrepreneur who needs angel money is to network among graduates of his or her college or university. For $199, UniversityAngels.com screens business plans from entrepreneurial alumni of 77 U.S. and foreign colleges and universities, posting standardized summaries on special Web pages open for one week only to alumni angel investors. After that, the summaries become available to angel investors from other schools.
- vFinance.com matches entrepreneurs with funding from investors. The site has 80,000 potential angel investors and 107 lending institutions, and it allows people to search in their own geographic area for people of high net worth who have experience or expertise in a particular field. You can submit a business plan online to a secure site where it is referred to potential investors.