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How to Find and Persuade Small Business Investors

October 20th, 2009

money-from-small-business-investors.jpgThe most difficult task facing any entrepreneur or current owner of a startup company is trying to solicit equity from small business investors. You’re asking people to make long-term, illiquid, risky investments in your business while offering little if any say in how the business is run. In effect, you’re asking them to become silent partners. Is it any wonder so few people say yes?

There are two secrets to successfully recruiting small business investors. First, you must become an expert on the people you are approaching. You need to know their risk aversion and needs in order to tailor your proposal to fit them. Most of all, you need to know that they actually have the funds to invest. That’s because the second secret to successfully recruiting investors is to realize you’ll almost always be rejected initially, and the one reason for a no that cannot be turned into a yes is “I don’t have the money.”

In order to convince someone to invest in your small business enterprise you must be seen as the ultimate expert in its past, present, and future. You need to know your business plan inside and out. You must have an answer to every possible question, no matter how insightful or inane. But that’s not enough. You also need to know all there is to know about the person you’re approaching. Does he have sufficient funds to invest? Has he invested in businesses like yours before? How did those investments turn out? What kind of investments turn him on or off? Is he looking for a good return on his investment in a short period of time? Or is he interested in long-term growth? Has he shown a proclivity for taking risks, or is he risk adverse? Who are his accountants and investment advisors? Does he have experience in managing a business? Does he have experience in a business like yours? Can he help influence other investors to come aboard? Is he a “giver” or a “taker”?

Your incredibly detailed knowledge of your business can serve as a foundation for trust, but it won’t be sufficient to land a small business investment. You not only need to treat the potential investor with respect and care, but you must also convey that you’ll take better care of his money than you would your own. All of your personal trust building won’t be enough, however. You’ll also need to bring in outside factors to document what you’ve said. Market surveys can help. Certified financial statements are a definite plus. Outside reports from marketing consultants and industry analysts will add meat to your claims. Most impressive are any third-party endorsements of your business plan. You need to do everything you can to create enough trust in just one single small business investor. Once you break the ice you won’t need to be as desperate.

It’s always easier to get the second investor than it is the first. There’s a bandwagon effect that takes place among small business investors. When one investor has demonstrated faith in your plan by signing on, it encourages others to do the same. Rather than taking a risk on an unknown, they’ll see it as getting in on the ground floor of a great deal.

To find out why a potential investor has said no you’ll need to ask him. Unfortunately, not everyone will tell you the truth. In fact, most will fudge their answer for one reason or another. They may not want to hurt your feelings. Or they may not want to reveal their lack of knowledge. Whatever the case, you may need to read between the lines and chase down outside leads to get a true reading on the reason.

If you sense or learn that the potential investor didn’t understand your plan, you need to subtly get around their deficiency without damaging their pride. I’ve found that the best way to do that is to ask to meet with their accountant or investment advisor as soon as you see that a ‘no’ is coming. Explain that there are some additional intricacies about the deal that you need to discuss, but that you don’t want to bore him with the details. Then, ask for permission to contact his advisors. You’re almost sure to get the okay, since the investor sees it as a way to spare himself from having to say no. Once you’re in touch with the investment advisor you’ll have a chance to pitch a more informed audience, or discover some undisclosed obstacle.

If you find out that the potential investor thought your plan was too risky, you’ll need to alter your proposal. Perhaps you can offer them a surer exit from the deal. You can offer to buy them out over a period of time at an acceptable yield (that’s called a “put”), or to have someone else buy them out. You could also offer them a hybrid deal. Tell them that if they make a five-year loan to the company, when it comes due (or sooner at their option) you’ll give them the choice of turning the loan into equity, or getting back their funds with interest. Remember, getting that first small business investor is the key. Be as flexible as you can be now, and you won’t need to be as flexible in the future.

If you discover that the potential investor didn’t feel he would have enough input into decision making, come back with a further explanation of how you’ll be reporting. Explain that you’ll be acting as responsibly as if you were a public company. Say that you’ll be giving him updates on operations every ninety days, at which time you’ll be asking for bis feedback, and your accountant will give him a comprehensive financial report every six months.

Interestingly enough, regular reporting is usually sufficient to preempt any investor intrusions into operations. Simply demonstrate that you respect their knowledge and the vital role they play in your business and they’ll be happy.

If you figure out that the potential investor didn’t believe in either your numbers or your ability to run the business, you’ll need to stall for time. You’ve already put them through the full court press. Nothing you do or say at this point will make them change their mind. Instead, ask if you can come back to them in the future with some further information. Having turned you down once already they’ll happily agree to giving you another audience just to ease their own guilt. Rather than trying to alter your plan or presentation, come back to this potential investor when you have another already signed up. Most of the time the only thing that will turn around a ‘no’ based on lack of faith in you or your numbers is that another investor has faith in you and your numbers.


This article on finding small business investors was sent to us by “Chenting”, a member of the DigitalPoint forums.


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