So you – the enterprising entrepreneur – think raising capital for your business is tough? Not necessarily, if you know how to go about it. We ask private equity investor Jeffrey Paine how.
Jeffrey Paine has been in private equity and business investment for 7 years, and has invested in companies in India, China and the United States. He gives us some tips on how and where entrepreneurs can seek funding.
Where are the main sources of funding for small start-up businesses?
Entrepreneurs should look for investment in this order –
First, an entrepreneur’s own money. Investors will not be confident in entrepreneurs who don’t pump money into their own businesses.
Next, try your friends and family. These are the people who will usually offer you loans with reasonable or no interest. Just be careful – most people think that raising money is the hardest thing. It is actually returning the money – especially when it comes to friends and family – because bridges can be burnt very easily.
Then you move on to business angels you don’t know very well. Try to get an introduction from someone who knows the angel. Do your research. You need to know who his best friends are, and those who do business with him and whom he trusts. Make friends with them. Always have the business angel like you as a person first, and then do your pitch only if they want to talk business. One thing to remember – when someone introduces someone else, their reputation is at stake.
Finally, you can approach institutional investors such as venture capitalists. However, in Asia there are very few institutional investors who focus on early stage deals – they are usually risk-averse.
How do I know if an investor would be interested in investing in my business?
Businesses belong to two categories – highly-scalable businesses, or normal sustainable businesses. Depending on investors, they may look at either kind of businesses.
It also depends on the profile of the investors, who look for different kinds of qualities in businesses.
Strategic investors are those for whom returns are not the main focus and invest for different reasons, such as business angels. Friends and family who invest in your business also fall into this category.
On the other hand, risk investors are those who look at market size, strength of management team, and how unique the product or service is. Most importantly, how highly probable they can exit and get their money back. A business’ market size will determine its scalability of the business and hence its returns.
All business plans should be structured for risk investors. It’s the hardest to do.
How do I approach investors?
First you always have to have a solid business plan. How do you know whether it is solid or not? You may not know, so you have to find someone with experience to read it. Choose the right people to get advice from, such as other businessmen. If your business plan is professionally done, no one can blame you if things go south. You are ultimately accountable to anybody who invests with you.
When approaching investors, never be too openly needy. Don’t ever say you’re raising money. Think about it – If you’re that good, you probably already have funding. There’s currently too much money and too few good deals in Asia, so you can afford to play hard-to-get.
Interestingly, public relations help.
What kinds of businesses receive the most funding?
Not surprisingly, consumer technology – mobile and Internet – receive the most money from venture capitalists. Depending on their background, business angels can invest in bars, restaurants etc. Silicon Valley venture firms like to contribute and invest back into technology companies.