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Understanding Investors

There are several ways any business, large or small, can get its initial funding. These include the owner's own capital, family and friends investing or loaning money, bank loans, SBA loans, angel investors or VC money. These are probably the most frequently looked at resources.

Getting the needed capital to give your company its "best efforts scenario for success" is largely dependent on your understanding of why an investor is going to give you any amount of money. If it is your own money, then you really don't need to be concerned. But for those of us who don't have pockets deep enough to fund our own ventures, knowing what the investor will get out of it is paramount to getting the check.

Presenting an idea to an investor requires that you be a salesman. This means that you need to profile the investor to know what their needs and wants are. If you are approaching family and friends, many of their needs are to lower their downside but their want is to see you succeed. Often they will invest more on their belief that you will follow through than their understanding of the business idea or an expectation of financial success. Bill Gates father gave him the initial money for Microsoft, assuming it was the equivalent of flushing it down the toilet. Though estranged from each other, the Microsoft founder held that investment in custodial shares, offering the repayment. Family just does things based on your passion and integrity to work at something you believe in.

In my opinion, it is sometimes harder to get money from those who love you than it is from investors. Why? Because your family and friends probably know the good and bad of your life history. It may become very difficult to show that this passion for your new business is any different that when you wanted to learn the saxophone when you were 10 and quite after a week, though your parents paid for six months.

Professional investors, on the other hand, understand risk, are savvy to markets and want to see that you have a plan that is executable with the resources to do just that. They don't care about your saxophone lessons, though they do care about your industry expertise and management capabilities. And each investor is a bit different. Again, this is where you become a salesperson needing to define the needs and objectives of your prospect. Do they seek a tax shelter? Do they seek to expand a current industry and want to build companies to take them public? What downsides are they mitigate against? How involved do they want to be with the company?

Banks are looking for collateral, plain and simple. You can get a loan without much trouble if you have good credit (personally or as a company if already established) if you can provide collateral in the amount you are seeking. Private investors, perhaps contacts through a CPA or attorney, may be looking to offset other gains that year and will want to structure things such that they can write it off. Venture capitalists may want to be hands on in management, certainly in the board. You need to be aware of how all these desires ("requirements") play into you getting funding. You will also need to determine how much of your company you are willing to give away in order to get started.

But if you approach these investors in this capacity, specific to their needs and tailor your proposal and pitch to their position, you will be much closer to closing the deal and getting your company the valuable assets it needs to rise to the next step.

Learn more about this author, Kimberlee Leonard.
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