Frequently, I have clients ask about different opportunities to fund their small business startup and it seems that most individuals are interested in investors. This term tends to be the nebulous catch all for individuals that give away money but there are important distinctions in investor groups. This article is meant to help you understand venture capitalist, angel investors, and individual investors.
Venture Capitalist
Venture capital investments are generally made in cash in exchange for shares in the invested small business. It is typical for venture capital investors to identify and back companies in high technology industries such as biotechnology and IT (Information Technology). In 2008, venture capitalist-backed account for 10 percent of sales and private employment, but well less than 1 percent of companies.
Venture capital is important for building high growth companies. Venture Capitalist backed projects are 150 times more likely than average small business startup to create jobs. Venture Capitalists invested $18 billion in business startups last year. Over all, venture capitalists made 2,802 deals, investing in 2,372 companies. Approximately 728 small businesses received first-time funds or $3.3 billion in first-time financing. In 2008, average Venture Capitalist investment was $7.4 million. Venture capitalists are often the first choice for firms who are looking for a large-scale project or need money for research purposes.
Angel Investors
An angel investor, also known as an informal investor is an affluent group of individuals who provide capital for a small business startup, usually in exchange for convertible debt or ownership equity. There is a growing trend for angel investors to pool together into angel groups or angel networks to share research and pool their investment capital. In 2008, the average angel group investment was $275,000. As a whole, angel groups make one quarter of the investments of venture capitalists. Always have your documents reviewed by a lawyer before you agree to any funding terms.
Individual Investors
Individual investors are often persons who dabble in investments and have limited funds to appropriate to your small business. Many times individual investors are people you know like family and friends. The average individual angel investment is only $77,000, half of individual angel capital is provided as debt, and more than 2/3 of individual angels are unaccredited. Be careful when dealing with individual investors, providing appropriate rates of return using debt would violate usury laws.
Whichever method you choose it is important to understand the strengths and weaknesses of your investor. In 2008, overall 7.3% of business plans made it through the screening process. Only 3.3% made it to the presentation process. About 2.8% had investors complete due diligence and 2.1% received investment. Working with investors is competitive and it is important that your business plan meet their exacting standards. A solid small business plan should grab hold of the vision in which you want your company to be perceived, plant the seed to grow a successful and profitable small business and prove the two previous points to investors. Finally, always understand the investor’s business plan qualifications before you begin solicitations. Being smart early on will increase the chances of your success and help you achieve that all-important capital for your small business startup.
Whether you are just starting out or growing your small business, a sound business plan is your road map to success.
Writing a business plan will force you to objectively develop and evaluate your tactical and strategic plans. It will also help you identify the opportunities and risks encountered as a result of your decisions. Most importantly, you will understand who your customers are and how you can meet or exceed their needs and expectations.
We invite you to spend some invaluable time with BizCentral USA’s senior business plan consultants and learn how to not just build an effective business plan, but utilize it to insure your small business’ success!
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Whether you are just starting out or growing your small business, a sound business plan is your roadmap to success.
Writing a business plan will force you to objectively develop and evaluate your tactical and strategic plans. It will also help you identify the opportunities and risks encountered as a result of your decisions. Most importantly, you will understand who your customers are and how you can meet or exceed their needs and expectations.
We invite you to spend some invaluable time with BizCentral USA and learn how to not just build an effective business plan, but utilize it to insure your small business’ success!
Topics of Interest:
Company Summary
Strategy & Implementation
Financials
Market Segmentation
Don’t let your small business dreams fail or fall short of their actual potential! Learn how to prepare your small business for success by attending our webinar on Tuesday, April 27, 2010 from 3:00 p.m. – 4:00 p.m. (EST).
When people always ask me, “why should I have a business plan?” I tell them that having a well written business plan is very important to a business at any stage of their growth process.
• Helping you to make your vision clear and decide whether or not to move forward with the idea.
• Determining if your product or service has a sufficient market to support it and whether or not it will be profitable.
• Providing an estimate of your start-up costs and how much you’ll need to invest or finance.
• Convincing investors and lenders to fund your business.
• Defining your target market and how to best reach them.
• Establishing or reevaluating your competitive position within the market.
• Defining corporate objectives and programs to achieve those objectives.
• Helping your business make money from the start by developing effective operational strategies.
• Understanding the risks involved and anticipating potential problems so you that can solve them before they become disasters.
• Setting a value on a business for sale or for legal purposes.
A business plan should be an evolving document. It should be adjusted as the marketplace changes, not written and left on the shelf. In some cases, it may be best to work with a professional business plan consultant on the development of your business plan. A business plan consultant will be able to help guide you along the way and ensure that your finalized plan meets SBA standards and that it is presented in a professional format.
In order to do business with the Federal Government, an interested small business should become certified under the Small Business Administration’s (SBA) 8(a) program. The SBA’s mission is to maintain and strengthen the Nation’s economy by aiding, counseling, assisting, and protecting the interests of small businesses and by helping businesses and families recover from disasters. The BD (Business Development) assists firms owned and controlled by economically and socially disadvantaged individuals, enter the economic mainstream. The 8a certification process is complex and takes on average three to four months to get completed. Once you have completed the process and received your wonderful letter saying, “congratulations you have been accepted” you still have to complete a SBA form 1010C.
This is a business plan that includes a detailed marketing plan for your business. Additional required topics included within the 1010C form are as follows: executive summary, business history, business environment, products and services, as well as other crucial topics. As soon as you receive your letter of approval from the SBA you will be asked to contact your local office (these specific details will be listed in your letter) and set up an appointment to review your business plan. This meeting will help to evaluate your small business’ potential for success as a certified 8(a) participant. If you are prepared for that meeting by already having a business plan prepared, it will enable you to complete the process immediately and receive your 8a certification. In other words, you enable your small business to begin bidding and contracting.
This is the final step to the SBA’s 8(a) certification process and it can delay the process if you are not prepared with a 1010c plan. Don’t delay your firm’s ability to receive contracts because you don’t have a business plan. In the words of John L. Beckley, “Most people don’t plan to fail, they fail to plan.”
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business startup, usually in exchange for convertible debt or ownership equity. There is a growing trend for angel investors to pool together into angel groups or angel networks to share research and pool their investment capital. In 2008, the average angel group investment was $275,000. As a whole, angel groups make one quarter of the investments of venture capitalists. Always have your documents reviewed by a lawyer before you agree to any funding terms.
