How to Find Private Investors

This is not about finding venture capitalists. This is about finding private investors [also known as angels] to finance your business. Venture capitalists have become professional investors of other people?s money. They are very conservative! Less than 1% of businesses seeking money from venture capitalists receive it. Private investors fund approximately 20% of the proposals presented to them. Private investors fund 300 businesses for every one business funded by traditional venture capitalist. Private investors do not usually make a living from investing in other people?s businesses. These ?angels? are the largest source of risk capital in the country. Approximately one million private investors provide capital for businesses each year. Although this figure includes relatives, friends, and associate, one third of these angels were strangers to the entrepreneurs. Most of these investors made their fortunes by starting businesses and they use their discretionary money to invest in private business opportunities.

Private investors seek business investments with a good opportunity for growth. These decisions are based on their perceptions of the degree of risk compared to the likely rate of return on their investment.� In addition to the significantly better odds for getting the money, private investors have many advantages over venture capitalists. Some additional advantages are:

The private investor is using his own money. Since others are not questioning his judgment, he often invests in riskier deals or in more deals based on his intuition and experience.
The private investor is usually interested in the smaller deals. A venture capitalist may be only interested in deals over $500,000. Over half of all angel investments are under $50,000. Usually, more than one angel will participate in the financing of deals over $100,000.
More than 60% of the investments made by private investors are in start-ups. Only 15% of venture capitalist investments are in start-up businesses.
It is easier to sell to private investors. Venture capitalist must perform due diligence. Today, most private investors require a business plan be submitted to them. However, they frequently make their decision based on their prior experience and intuition.
Angels make decisions in weeks, not the months needed by venture capitalists.
The private investor is easier to contact. Few intermediaries exist and they are local. One million angels are easier to find than the 5,000 traditional venture capitalists. It has been estimated that one angel exists for every 250 adults. Therefore, a city of 250,000 would have about 1,000 angels and maybe no venture capitalist.

Private investors look for certain characteristics when investing in a company. This is especially true when the angel is not a good friend, or relative. Some areas that are of the major concern to the private investor are:

The idea must be a viable business concept. Private investors use their intuition and experience to look for products or services with a clearly defined market. � However, a well-prepared business plan will improve your chances of convincing a private investor that this idea is economically viable.
Private investors usually require at least a 30%-40% annual return on their money, because the private investor is usually interested in finding a long term income opportunity. The venture capitalist usually requires a 50% return on their portfolio. Since less than 20% of their deals are successful, the venture capital firm is usually looking to make a 500% to 800% return from their successful deals in order to carry the failures. Also, they are only interested in deals with a defined exit strategy such as joint venture, buyout, or the company going public.
Private investors like to invest in companies that they can see and in familiar markets. Therefore, they usually invest in local companies within twenty minutes of where they live.
The private investor?s primary concerns are management integrity and �� commitment. They are not as concerned about career experience as venture capitalists.
Angels like the prestige of owning a piece of a business. Therefore, image is important. People like to be around celebrities. Consider having a sports figure or other celebrity involved with your business in order to attract other investors.
Angels enjoy the excitement of something new or different. Their hot buttons are not just the financial rewards, but may include a sense of civic or social responsibility.

Although private investors are a million strong, no comprehensive list is available. Imagine that you had just won the lottery. Would you place your name on a list of winners? If you did you would be overwhelmed by all the people asking you for money. Thus, the task of finding private investors is difficult, but not impossible. Some of the places to discover them are:

You should check with friends and relatives first. They may want to help because they want you to succeed. They might even agree to lend you their assets in order for you to obtain bank financing. Senior citizens often pledge their certificates of deposit on loans to relatives and friends. They continue to receive their interest checks from the bank as long as you make your payments. They might be willing to loan you the money because they want a higher return than the bank pays.
Professionals with discretionary capital often invest in businesses or may refer you to their clients. Examples are doctors, dentists, lawyers, accountants, architects, and consultants. You can find lists of these professionals in the Yellow Pages and the membership directories of the many professional associations.
Any existing or potential suppliers may be a source for capital. Their ulterior motive is to tie your business to their service or product.
Customers may provide investment capital. This is more likely if the customer depends on your product or service in order to produce his product or service.
A similar company in another market may be willing to invest in your business. Each business helps the other by sharing in information and even investing in each other.
Employees can be investors. Matter of fact, certain tax advantages exist should you utilize this method of raising capital.
Successful entrepreneurs and managers may have capital to invest. They often look to invest in the similar industries to their own industry.

When trying to find money, you should contact the people whom you know first. Call them for an appointment. Take them your business plan and make a professional oral presentation. There are four extremely effective methods to find, contact, and persuade strangers to invest in your business:

You can place a classified ad in the Sunday Business Opportunities section of �� your newspaper. This method is quick, cheap, simple to write, and produces results.
You may dial for dollars. You must develop a good list and be extremely persuasive on the telephone. Although the rejection rate is high, you can find interested prospects.
You can contact a business broker to sell part, not all, of your business. In his files are inquiries from numerous interested individuals who did not buy a � business. They might be interest in buying part of your business. You may have to convince the broker that it is worth his effort, but he probably handles ten serious inquiries for every deal done. You can find a list of business brokers in the Yellow Pages.
You can advertise your company in investor magazines and newsletters. These ads described the company, but there is no formal solicitation for capital.� However, investors know to contact you when they are interested in your� company. Prior to any formal solicitation program, be sure to get expert legal advice. This activity is very complicated and highly regulated.
Go to the association meetings for your industry or trade group. Use these meetings not only as a networking opportunity but also casually mention that you are looking for money. Try to get leads and/or interested investors from the attendees.
Ask someone with money to invest to critique your business plan for you before you send it to potential investors. After reading the plan, they will express any interest they have in the deal. If they aren?t interested, they can give you constructive feed back without having to actually turn you down. Be sure to ask them for names of any of their contacts who might be interested.

When seeking private investors do not overlook individuals who may be short on cash, but long on credit and/or collateral availability. It is worth something to you to get the capital from whatever source. The ability to influence the decision in your favor may be critical.

Remember to ask everyone whom you deal with on a business basis: employees, associates, suppliers, customers, landlords, etc. After your business is a success, you will have many people say that they would have invested in your business. Give them that opportunity when you really need their money. Your ability to form and take advantage of alliances is critical to your long-term success.