Every entrepreneur should know what private investors are and how to find them. Finding an investment as a startup founder with little to no past experience in securing funding can be scary. Lenders such as banks do provide lives of credit and small business loans, however, they may not be keen to invest in a startup with no track record or proven revenues.
Luckily the amount of initial investment a startup needs to get off the ground and launch can come from private investors that aren’t associated with banks or other large institutions. With that said, you aren’t the only startup that will be actively looking for these private investors. Private investors are the preferred type of investors for most startups because private investors are willing to take more risks with new companies. They may be more flexible on their criteria for lending or investing as well.
If you are trying to get investment from private investors you will have to find them first. Not to mention you need to know what a private investor is and their types to make sure you find the right one for your startup.
This article will explain everything you should know about private investors and how you can find them, so read on.
The Ultimate Guide To Pitch Decks
Here is the content that we will cover in this post. Let’s get started.
- 1. What are private investors?
- 2. What are the different types of private investors?
- 3. Friends and family:
- 4. Angel investors:
- 5. Private equity investors:
- 6. Private Investors Versus Venture capitalists:
- 7. How to find a private investor for your startup?
- 8. What do private investors look for in a startup before investing?
- 9. A clear business plan
- 10. Management Team
- 11. Ability to generate profits
- 12. Liquidity of assets
- 13. Expenses
- 14. Verifiable business metrics
- 15. What are the benefits of working with private investors?
- 16. Better investment terms:
- 17. Less emphasis on credit history:
- 18. They are more willing to risks:
- 19. You get to access the knowledge of investors:
- 20. Conclusion
What are private investors?
A private investor is a person or business that gives money to help startups or businesses take off and grow. Private investors have several advantages over other funding methods for startups. Most of the time, private lenders focus on one type of business and industry, so you can find an investor that invests in startups similar to yours.
They can help you in more ways than just giving you money. Investments can be made through equity or debt. Equity is when you trade money for ownership of your company. The investors will get their money back based on their stake in the company or the number of company shares they own.
Startups are risky businesses that are just getting started or are in their early stages. To grow their business, they need money, and they need it fast, so they don’t get left behind. Most of the money that these small companies need can come from private investors. It is usually hard for new small businesses to get money from big banks.
Even if you have a detailed plan when you go to the bank for a loan, it’s likely you won’t get any money because startups are a big risk for the bank. If a bank turns you down for a loan, don’t worry you can still pitch private investors for money. Private investors are individuals and companies that are not banks. Most of the time, they give money to new businesses in exchange for ownership of the business. They may also make loans or loans that can convert into equity later.
Now that you have an overview of private funding, also learn how to build a target list of investors. Check out this video to know more.
What are the different types of private investors?
Before you start your hunt for a private investor, you must be aware of the different types of private investors that you may come across. So, without further ado, here are the different types of private investors that may be willing to invest in your startup:
Friends and family:
Startups and small businesses often turn to friends and family as their first private investors. They are a great source of investment because friends and family already have the trust and confidence in you that is required to take the risk of investing in a startup. Friends and family can either lend money to your new business or make an equity investment.
When it comes to money, don’t take the investors lightly just because they are your family and friends. Remember that your investors will only get paid back if the business makes money. Give them a good pitch, show them your business plan, and make sure they understand the risks of investing their money, even if they trust you completely, in order to avoid ruining your relationships.
See How I Can Help You With Your Fundraising Efforts
See How I Can Help You With Your Fundraising Efforts
Angel investors are wealthy individuals who put their own money into new businesses when they are at the startup phase. Angel investors sometimes put their money by joining forces with other angel investors. This is called an angel group, and it can bring a more significant amount of money to a startup.
Angel investors should be “accredited investors,” as defined by the Securities and Exchange Commission (SEC). Accredited investors have a net worth of at least $1 million. In addition, they earn $200,000 a year or $300,000 a year with their spouse. Along with money, they also offer mentoring or advice that makes them more valuable for your business.
Private equity investors:
Private equity is money that is put in by private individuals and private equity firms. In exchange for their money, private equity investors get a piece of the business or a loan note. The goal of a private equity investor is to make money by selling their share of the business after a few years.
While you can get private equity from individuals, this type of investment usually comes from private equity firms, which are investment companies that take money from individual investors and pool it to invest it in companies that have already shown great promise.
Private Investors Versus Venture capitalists:
Venture capitalists are professional investors. Venture capital firms have people who put money into the venture capital firm, and the firm has to give them big returns for their money. Because of this, what they look for in an investment may be different from what other investors look for.
They assess businesses and invest in them the same way people invest in stocks, and they do everything they can to make sure their investment brings a return. VC firms put more money into growing a business in exchange for a share of it than you’d expect from an angel or other individual.
Typically venture capital firms invest more at the later stages of a startup than private individuals. There are some which specialize in early-stage startups. Though they are going to be more demanding of you. Typically, they will come in after you’ve raised a round or two from other individuals or sources.
How to find a private investor for your startup?
Now that you know the different types of private investors that you may come across, it is time to address the real question, how do you find a private investor?
One way to find an investor is to look for them on the internet or on social media. There are many websites online that have information about investors. Angellist, Angel Investment Network, Crunchbase, and LinkedIn are just a couple of the online databases that contain the contact details of investors with great accuracy.
Promoting your startup is another great way to attract investors. You can do this through blogging, PR, social ads, and more.
Emailing and DMs have sometimes been successful in connecting with investors.
Or utilize a fundraising advisor who already has the investor connections and relationships you need.
The next step is to make the business pitch as good as it can be. The pitch is what investors base their investment decisions on. It should have diagrams, pie charts, and graphs, and it should be clear and full of information.
To get investors interested in your business, you need to be able to communicate well and give great presentations. However, above all these, the best way to find a private investor is to have a winning idea for your startup.
What do private investors look for in a startup before investing?
Investors have to make sure that your startup is worth their investment before they go ahead and hand over the money. So, in order to make sure a startup is a right fit for them, they look at certain factors, including the following.
A clear business plan
If you can’t explain your business plan, and efforts to capture the market, and make money in a clear way, investors will be confused and probably not believe in your company. Make sure your business model is clear and that you use factual data to show how and why your plan is going to work.
A good team is one of the most important parts of running a business well. Investors look to see if the team in charge has the right experience and tenacity to reach the goal.
Ability to generate profits
No matter how you look at it, a private investor will only be interested in a business if it can make money. If your sales (and profits) aren’t going up, it’s likely that they won’t make money in the future from their investment.
Liquidity of assets
If the company doesn’t have any liquid assets, it might not be able to pay its bills. So, investors need to be sure about a company’s liquidity before they put money into it. They make sure that the company maintains liquidity, and if your startup has liquid assets, you are likely to impress private investors.
High costs can kill a business. Investors look to see if a company has a way to keep unnecessary costs from getting out of hand, and has been responsible in managing debt.
Verifiable business metrics
A business metric is a measurable standard used to track, monitor, and judge the success or failure of a company. There is no scale that will work for every single investor. Different businesses use different ways to measure how well they are doing. However, the bottom line is to make sure you are keeping a record of your company’s progress so you can present it to the investors.
Keep in mind that in fundraising, storytelling is everything. In this regard, for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.
Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.
What are the benefits of working with private investors?
Working with private investors comes with a host of benefits, including the following.
Better investment terms:
The biggest benefit of getting money from private investors like friends and family is that the founder already has a good relationship with them and can trust them. That means it’s easier to get a meeting with them, they’re more likely to say “yes,” and they’re more likely to agree to more relaxed terms for the investment.
Less emphasis on credit history:
Private money financing doesn’t have the same requirements as a traditional bank loan. It doesn’t require a great credit score, like business lenders and bank financing do. So, you’ll save yourself a lot of time and stress when working with private investors. Most private investors care about how much money they can make in the future, and your business experience, not just your score.
They are more willing to risks:
Investors are often more willing to take bigger risks than traditional financial institutions like banks. This is one of the best things about working with private investors.
Also, while the private investor is taking a bigger risk than a bank, the founder is taking a smaller risk because private funding from angel investments usually doesn’t have to be paid back if the startup fails.
You get to access the knowledge of investors:
Private investors are people who know a lot, have a lot of experience, and are good at what they do. In addition to giving money, they also give advice and mentorship to the founders. There is nothing better than having direct access to the high-level expertise of experienced investors.
Private investors are probably the most attractive financing option for startups due to the many reasons explained in this article. If you have been struggling to find and secure private investment, this article should help you in beginning the hunt for a private investor.
You may find interesting as well our free library of business templates. There you will find every single template you will need when building and scaling your business completely for free. See it here.