Finding private investors for a new business requires showing potential partners realistic, quantifiable numbers. This will involve preparation of a business plan and a specific partnership agreement that spells out all of the details of your venture and answers as many questions as possible.
Develop Your Pitch
Before you approach potential investors with your idea, prepare a business plan that includes objective information about the business concept, product or service samples, customer focus group and survey results, marketplace analysis, existing competition, your marketing plan, biographies of key personnel and your budget, sales and profit projections. Draw up your investment proposal, outlining how much money you’re seeking, what it will be used for, what you are offering in exchange for the investment, and potential payback and profits. You might offer a percentage of the business or a percentage of the profits. You might offer a limited payback or a perpetual piece of the business. Determine if you are looking for a silent partner or a partner who brings management expertise to the business. The more of your own money or collateral you put up, the less you’ll have to give away to investors, in terms of profits or ownership.
Friends and Family
One of the first places to look for private investment money is friends and family. This will be less awkward if you have a business plan and a proposal that demonstrate you have examined the risks and believe you have a high certainty of success based on your research. Friends and family might be more likely to lend money without asking for partial control of the business operations and may be more likely to defer their payback if revenues are initially slower than expected. They might also be less likely to take legal action against you if things don’t turn out well in the long run. Have a contract that spells out both the responsibilities and potential benefits of all parties to reduce the chances of miscommunications and potential long-term hard feelings.
Private Equity and Venture Capitalists
Look for venture capital firms or angel investor clubs in your area or industry. Venture capital firms or individual angels look for businesses with potential to provide a large return on an investment. They might ask for a large percentage of the business or some say in the management of operations. Angel investor clubs usually have specific guidelines for those who want to make a pitch at a club meeting. Contact these groups early to learn what you’ll need to do to make a presentation. Depending on the size of your business and amount of investment you're seeking, a venture capitalist might want a seat on your board of directors.
Crowdfunding is just what it sounds like: many people contributing money to help fund a project. This is usually done via the Internet. Some websites allow you to pitch an idea, asking people to donate -- rather than invest -- money to help you launch. This typically requires many people to get involved because it’s unlikely that anyone will give you a large sum of money with no return. If you’re starting a business that will have a positive impact on a community, you might generate a viral buzz. For example, if 5,000 people each donate an average of $10, you can raise $50,000. People do this because they might want to use or buy the product or service you’ll be offering once you launch. Other crowdfunding programs require you to provide a return. In those cases the "crowd" funds and owns part of your business, much like those who purchase shares in a company.
Consider approaching complementary businesses that might want to diversify their operations or that would benefit from your new business. For example, if you are considering opening a banquet hall in an area with limited event space, a large caterer or wedding planning company might want to help you start a venue it can use for its events. Someone looking to start a website development or graphic arts business might approach a full-service marketing firm that doesn’t offer those services.
Sam Ashe-Edmunds has been writing and lecturing for decades. He has worked in the corporate and nonprofit arenas as a C-Suite executive, serving on several nonprofit boards. He is an internationally traveled sport science writer and lecturer. He has been published in print publications such as Entrepreneur, Tennis, SI for Kids, Chicago Tribune, Sacramento Bee, and on websites such Smart-Healthy-Living.net, SmartyCents and Youthletic. Edmunds has a bachelor's degree in journalism.