You have a great business idea. You’ve got the product, the plan, and the unwavering passion. But to make your new business venture happen, you need money. Turning your dream into a reality often involves one significant challenge: finding investors.
“When you’re just starting out, the whole concept of raising capital can be daunting and confusing,” says Michael Duda, cofounder and managing partner of Bullish Inc., a venture capital firm that invested in companies like Warby Parker, Peloton, Harry’s, Birchbox, and Primary.
“People see Shark Tank and imagine that’s how the world operates. But the reality is, less than 1% of startups ever get venture capital, and there are many other ways to raise money.”
Here’s what you need to know about finding startup cash for your business, including the types of investors and tips for securing startup funding.
Table of contents
Types of investors
- Friends and family
- Angel investors
- Venture capitalists (VCs)
- Accelerators and incubators
- Crowdfunding
- Government programs
Thanks to the Shark Tank–ification of the culture, raising capital may make a small business owner think of seeking investment from an angel investor or venture capitalist in exchange for equity. In reality, small businesses have many possible paths for raising funds. Here are six strategies:
Friends and family
If you don’t have a long track record or deep network, friends and family funding (FFF) can be an accessible and straightforward way to raise funds. Those who know you may believe strongly in your vision and may be more flexible with equity or repayment terms. This may be a useful option if you’ve already invested your own money and are looking to take the next step.
However, some say never do business with friends, and for good reason. Mixing business and personal relationships can be messy—especially if things don’t work out. Communication, transparency, clear expectations, and professionalism are paramount.
Angel investors
Angel investors are wealthy individuals who invest their personal funds in early stage startups in exchange for an equity stake. They generally provide seed funding—the initial funding to help you get off the ground—and act as early supporters.
Investing in a new company very early on is risky, so equity stakes are typically larger to compensate for the risk they are taking. Find angel investors by attending industry events and conferences or by paying to join angel investor networks who connect funders with startups. Cold outreach is also an option, but introductions from people in your network are ideal.
Venture capitalists (VCs)
VCs are professional investors who manage funds pooled from institutional investors like corporations and pension funds. Venture capital firms, like Bullish, generally come in after angels. They tend to provide larger amounts of capital and often take a more active advisory role in shaping the company’s strategy.
A related category is corporate venture capital, or CVC, which is the investment arm of an established corporation. CVCs invest in startups relevant to the enterprise’s industry, typically seeking access to innovations, potential partnerships, and strategic insights.
As with angels, you can connect with VCs through networking opportunities, industry events, cold emailing, or referrals. You may also meet VCs by participating in pitch contests, demo days, and accelerators.
Accelerators and incubators
Accelerators and incubators aren’t investors, per se, but they can serve a similar role. They provide funding, mentorship, and other resources early on in exchange for equity or for a fee.
Business incubators help entrepreneurs refine their startup ideas, providing resources like office space and access to advisers over an extended period, usually one to five years.
Accelerators are typically shorter, more intensive programs to help early to mid-stage startups scale and grow. They offer funding in addition to resources like product development guidance and access to mentors. Many accelerators end with demo days, pitch contests, or other pitch events where startups can attract investors like VCs, angels, and corporate partners.
You can find accelerators and incubators by cities, states, VC funds, private enterprises, and more. These programs often accept only a limited number of companies, and competition can be fierce.
Crowdfunding
Crowdfunding can be a remarkably accessible and flexible way to raise capital from many investors. Through online platforms like Kickstarter and Indiegogo, startups share their business plans, brand strategies, product prototype photos, videos, and other resources to persuade contributors.
Contributions may be donations made in exchange for rewards or pre-ordered products, or investments made in exchange for equity in the company.
The downside is crowdfunding platforms collect fees and host thousands of campaigns, making it hard to stand out. Crowdfunding regulations vary by jurisdiction, so ensure compliance—particularly if you issue equity or debt.
Government programs
When businesses succeed, it’s good for the economy, so many city, state, and federal programs support and foster success. This can be from direct loans, small business grants, and accelerators to ancillary benefits like tax credits, support services, educational resources, and infrastructural developments.
Many locales offer funds earmarked for marginalized groups, specific industries, and economically disadvantaged areas. For example, the US Department of Agriculture’s Rural Business Development Grant encourages economic development and job creation in rural areas—so you may choose to start your research there if applicable.
Tips for fundraising
- Prove your value proposition and market opportunity
- Demonstrate a clear plan for using the capital
- Expand your search to several sources of funding
Every company and potential investor is different, but a few tips apply to most situations:
Prove your value proposition and market opportunity
Investors are looking for growth opportunities. They try to predict if a business concept will not only succeed but scale over time to generate sustainable profit and growth.
Explain how your offering better addresses your target market’s needs than existing solutions. Detail a solid business model, strategies, revenue streams, realistic financial projections, and plans to reach larger markets over time. Back up your assumptions with market research, and if applicable, include information like customer surveys and metrics about your traction so far.
“Money is fuel for a business, but fuel doesn’t do anything if you put it into a car that doesn’t work,” Michael Duda says. “As a venture capitalist, I’m in the ’potential’ business.”
Demonstrate a clear plan for using the capital
This is different and more specific than proving a solid business plan. Why, specifically, are you seeking funding right now? What will you do with the money, and how will it help the company grow and succeed? Michael says some entrepreneurs miss the forest for the trees here, failing to demonstrate a strategic and targeted plan for the funds.
Investors want to see the particulars of your plan. Some startups may be early enough in their lifecycle and need the money to build a prototype of their product. Others might look to grow their engineering team to develop their software further. More established companies may seek to expand into new revenue streams or geographic markets.
Expand your search to several sources of funding
Remember, Michael says less than 1% of startups ever obtain venture capital, so think beyond angel investors and venture capital firms. Friends and family, crowdfunding platforms, local small business grants, and accelerators are excellent choices for many businesses. Explore all your funding avenues and know you don’t have to choose just one.
No matter which paths you explore, Michael stresses the importance of showing potential investors you deeply care about your mission, the problem, and your ability to solve it. After all, you’re asking someone to believe in you and back their belief with cash, so you have to believe in yourself first.
How to find investors FAQ
Is it hard to find investors?
Finding investors can be challenging, particularly for startups in the early stages lacking a track record and robust network. But it’s possible. Build a strong base with a captivating prototype, market research to confirm demand, and a strategic business plan. Diligently network and research to identify funding sources.
How can I find someone to invest in my business?
Beyond venture capitalists, you have various funding options, such as friends and family, grants, pitch contests, crowdfunding, incubators, and local resources. Leveraging personal networks, including colleagues, mentors, and advisers, can facilitate valuable introductions and support.
How do you ask an investor for money?
To appeal to prospective investors, first grasp their preferences and interests. Tailor your pitch to underscore your solution’s market need, your solid business plan and financial projections, and your commitment and credibility. Clearly articulate why you’re seeking funding, the requested amount, the equity stake, and the potential returns for the investor.
How do you choose an investor?
Choose investors who share your vision and long-term business goals, ideally with relevant industry experience, a proven track record, and a valuable network. Strong investor relationships are rooted in trust, mutual respect, effective communication, and a good rapport.
