5.0 Private Equity

FUNDING A BUSINESS >> Each section contains key Action Items located within the downloadable Action Guide >> Click to Download Action Guide.

CRITERIA AND SOURCES

5.1    Criteria

  • Great potential to achieve a liquidity event
  • Scale or the potential for the company to achieve significant annual revenues
  • Barriers to entry
  • Strong management team
  • Confidence of your exit strategy
  • Local companies
  • Within 200 miles

5.2    Friends and family

  • People that know you best
  • Investments usually fall between $5,000 and $100,000
  • Not all friends and family investments are equity investments
  • Who do you know? Who do they know? Can they invest?

A large percentage of entrepreneurs utilize investments from friends and family that know, like and trust them.

You MUST demonstrate confidence in your business plan when you seek investment capital and your research must support your confidence in the business opportunity.

If you cannot answer questions about your business from potential investors, then continue your research and market surveys until having a clear plan of action before seeking additional investors.

Seeking money from family and friends can lead to soured relationships if the business does not succeed.  Nobody likes to lose money, however when possible, seek loans and investments from friends and family that have the ability to potentially “absorb” a loss if the business fails.  The last thing anyone wants is to have a friend or family member suffer long-term financial difficulties due to the failure of your business.

How can you seek an investment from your friends and family?

There are unlimited deal structures that can be created with friends and family based on the business opportunity and the willingness of the investor.

You suggest to the investor what you are willing to give up based on the confidence in your business.  However, remember the Golden Rule, he or she who has the gold (cash), makes the rules.  It is YOUR job as the entrepreneur to stand firm when seeking cash for your business.  You have created an opportunity for an investor that should provide a nice return on their money.

Keep in mind; equity becomes ownership in the company that you will not have to repay if the business fails.  However, you will essentially now have a partner in your business.  If you choose to offer equity in your company, the investor will now expect to fully share in the upside or success of the company and may very well want to always be involved in the decisions of the company.

Equity investments will require both investor and entrepreneur due diligence to determine your company’s specific market potential and revenue forecasts to uncover the potential “equity” value of the investment.

Your goal is to promote a bright future for your company while preserving your ownership stake in the company.  In other words, if the investor sees huge potential in your business, they will want to be rewarded with a large return on their investment.

However, most businesses take nearly three times the forecasted investment and suggested time to get the company off the ground and reach the revenue milestones in the business plan.  Savvy investors know this and discount your business plan’s financials accordingly.

Therefore, the entrepreneur will want to entice the investor with reasonable and conservative forecasts that lead to realistic amounts of equity distribution in exchange for the investment.

It takes cash to get the company off the ground, so the investor must be rewarded for their contribution.

How do you search for investors amongst your family and friends?

You’re looking for people who know you well and will easily take your call to sit down and listen to you about your business.

As stated earlier, look for wealthy friends and family when possible and look for “business savvy” individuals who are open-minded to investment opportunities.

Do you know any business owners, CEO’s, vice-president’s of companies, investment brokers, connectors to wealthy individuals or wealthy retired friends and family?

How do you approach a friend or family member for an investment?

First and foremost, be prepared with your business plan and other documentation that shows you have done your homework about your business opportunity.  Demonstrating that you have been disciplined in your approach with market research, competitive research and target market surveys will be most impressive for the potential investor.  Potential investor’s want you to exude confidence in your plan.

Start simple by calling a friend or family member and say, “Hi _______, I’m not sure if you have heard, but I’m starting a company and I would love to brainstorm a little bit with you to get your feedback and opinions.  Could we get together for coffee one day soon?”

Coffee is simple with friends and family and provides more room on the table to spread out your documents than an expensive meal.  Always conserve your money and remember that investors will be watching your spending habits too.

Start with small talk to get reacquainted and then talk about why and how you are getting into business.  If your business solves a problem, you could start by asking the friend or family if they have ever “experienced” the problem you will solve for your customers before describing your business to them.

Go straight into suggesting that you simply page through your business plan.  Since your business plan has an outline, say, “Let me talk about some of the highlights in the business plan” and then simply reference areas in the plan to “prove” your business model to them.

You want to address any questions that you receive from them, which will keep their attention.  However, try to stay on track with your outline, so that you don’t miss any important sections.

Write down their questions as they ask them, so that you know their specific “hot buttons” or areas of concern with your business model.

Provide an answer if you can and if you don’t have an answer, tell them that you will get an answer for them.  Keep track of all questions because most likely other potential investors will have the same questions for you.  You’ll want to have a compelling answer or response for each and every question to alleviate concerns from anyone that learns about your business.

All throughout the presentation you should be gauging the responses and expressions from your investor prospect to get a “gut” feeling of their interest level in your business.

There are all kinds of reasons that people will choose not to invest in your plan and that’s no problem because your goal is to sift and sort through individuals until you find the ones that take an interest in you and your business plan.

Usually, at this stage, a friend or family member is placing a bet on YOU!  They will see the potential behind your business, but it’s you that they trust to bring the company to success.

At the end of your presentation, you’ll want to learn about their impression of the business, so let them talk.  Say, “_______, (name) what do you think of this business opportunity?”

LISTEN, LISTEN, LISTEN!

Write down their comments, questions and objections.

ADDRESS each item one by one until successfully removing each concern for the business.

If you are at a “comfortable” position in your discussion and you have provided answers that appear to have overcome the majority of their objections, then say, “________, (name) do you think this business represents a good investment opportunity?”

Notice that you did not ask them to invest, you merely asked if they thought it was a good opportunity.

LISTEN, LISTEN, LISTEN!

Write down their comments, questions and objections.

ADDRESS each item one by one until successfully removing each concern for the business.

You’ll probably hear lots of good feedback because that’s what people want you to hear.  However, you want to hear the “real” feedback and that’s when you say, “________, (name) would you personally consider investing in this company?”

You’ll hear all kinds of excuses at this stage and that’s to be expected.

Don’t take it personally, but when someone says “No,” ask him or her, “__________, (name) my goal is to truly uncover positive and negative feedback about the business opportunity.  What are some of the reasons that would prevent you from personally investing?”

LISTEN, LISTEN, LISTEN!

Write down their comments, questions and objections.

ADDRESS each item one by one until successfully removing each concern for the business.

There will be numerous personal reasons beyond your control on why someone is not willing to invest and that’s all right.  However, by asking the questions above you will get closer and closer to providing the necessary answers to attract investors for your business.

Now, it’s time to ask one last question in your meeting.

Now say, “__________, (name) is there anyone that you know who might have an interest in this business opportunity?”

Your goal is to uncover individuals who will say “Yes!” to your investment opportunity.

Raising money can be a long and arduous process and that’s why the entrepreneur must have a strong will to overcome every imaginable obstacle!

By now, you should have uncovered numerous questions and objections from potential investors that will help to shape future presentations to other potential investors and advisors.

Are you ready for your next hurdle?

The question now becomes, what will you offer or give up for financial assistance?

This will be a very subjective answer and will be individually determined by the potential value of the business that you intend to create.

Your business model, market potential, management team, revenue projections, proof of concept such as existing sales and customer surveys, competition and other factors will all help to determine the potential of your business.

Cash is king and without cash, there usually is no company.

Please meet with a CPA and other business advisors to uncover the best investment structure for your individual business model, opportunity and personal financial situation.

ACTION ITEMS: Complete the Action Items in your Action Guide.

START the process of raising funds from friends and family by calling those you have identified as possible investors. List five below:

1)

2)

3)

4)

5)

NOW, begin calling these people with a friendly “Hi _____, I’m not sure if you heard, but I’m starting a company and would love to brainstorm a little bit with you to get your feedback and opinions. Could we get together for coffee one day soon?”

CONTINUE to cultivate the relationship more and more by offering to show them your business plan and address the concerns that they bring up about your business. Demonstrate your confidence and show them you are ready and capable of overcoming adversity.

REVIEW Section 5.2 to record and implement the many details of this process as you progress towards your goal.

5.3    Angel Investors

  • Private investor (or group of private investors) who offers financial backing
  • Typically current or former entrepreneurs, successful executives, venture capitalists, or otherwise wealthy individuals
  • Angel financing amounts typically range from $50,000 to $500,000
  • Angel investors usually gain 10% to 35% of the equity of the company
  • Accredited vs. Non-accredited investors
  • Net worth in excess of $1 million or have annual income of $200,000 or more
  • Does your business have the potential for significant returns?
  • Who can introduce you to the right angel investors?

Angel investor networks

  • Angel groups or networks of 10 to 150 accredited investors
  • Pooling of resources facilitates combined research as well as pooled capital
  • An angel group will invest from $100,000 to $1,000,000 in a venture

Angel investor motivations

  • Think they can get a solid return on investment
  • Know, like and trust the entrepreneur
  • Feel they can add real value
  • Wants or likes the action

Angel investors are found throughout the United States and provide needed funding for early stage entrepreneurs.  Angel investors expect a large return on their investment similar to venture capitalists, however, they invest smaller amounts across multiple entrepreneurs.

Getting referred to an angel investor or an angel group by another entrepreneur, accountant, lawyer or someone else that knows them personally will serve you best.

However, angel investors are accessible and can be contacted directly if you cannot get referred to them.

The following organizations provide links to angel investment groups and resources throughout the United States.

Angel Capital Education Foundation -

www.angelcapitaleducation.org

Angel Capital Association -

www.angelcapitalassociation.org

Angel investment groups usually screen a business plan to make sure it fits their investment criteria. A small group or committee may then further evaluate the opportunity and request a meeting with the management of the company.  If the plan passes this first stage, the entrepreneur will be invited to “pitch” the business investment opportunity to a general meeting of the angel group members.

This process can take from eight weeks to eight months depending on the group and the frequency of their meetings.  The group may decide to invest as a whole or individual members may also have the opportunity to invest individually on their own terms.

Start early in your funding search to endure the time required to secure funding.

Angel investment groups are supremely critical of each business model that they review and the entrepreneur must thoroughly “know” his or her business.  Your business plan must be carefully analyzed in advance of your meetings and researched against competition to provide compelling features for great success.

When presenting to an individual angel investor or an angel investment group, you must exhibit complete confidence in your plan and provide answers to their questions.  If you bring members of your team with you to the presentation, they must be a great asset to your team and extremely knowledgeable.

You’ll generally have ONE opportunity to truly sell your business to the group during this meeting.  Once you leave the presentation room, the members of the group will “tear” your business apart and thoroughly critique your business model, your team, your presentation skills, your confidence and your ability to answer their tough questions about market research, competition and your financial models.

You may have the opportunity to follow up with the group if you need to research answers to a couple of their questions, but again, if you’ve made it to the presentation stage, generally your business has been reviewed and the group now wants a perfect presentation to make an informed decision about your business.

Create your own advisory board early in your development stage to review your business plan and uncover your business model’s strengths and weaknesses before any presentation.

Practice your presentation in advance of any investor meetings.

Good luck and start early!

ACTION ITEMS: Complete the Action Items in your Action Guide.

EXPLAIN why you think your business has the potential for significant returns.

IDENTIFY five well-known people who could introduce you to the right angel investors:

1)

2)

3)

4)

5)

NOW contact these individuals and ask them to make an introduction.

VISIT these sites to learn more about angel investment groups:

  • Angel Capital Education Foundation – http://www.angelcapitaleducation.org
  • Angel Capital Association – http://www.angelcapitalassociation.org

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