Raising money for a new venture is probably one of the hardest things for any entrepreneur. Although there are many options including bank loans, settling down on what works best for you can sometimes be a little tricky. Despite this, over the last few years, the popularity of private investors for small businesses has been gaining momentum.
Whether it’s in real estate, tech startups, or any other field, private capital from private real estate investors has been driving investments to new businesses in a huge way. This is not expected to change any time soon. Private investors are expected to remain an integral pillar in business finance for a long time to come.
What Are Private Investors?
Private investors for startup small business are simply an individual or a firm that takes their own money and puts it into another business. Private investors can invest in new companies, startups, established companies that have run into financial difficulties or need capital to expand and grow. In most cases, private investment is seen as the best alternative for businesses that cannot access traditional financing from banks. In addition to this, private investment is not a loan. In exchange for the capital offered, private investors looking to invest will get equity in the company they have invested in. The investor may also assume a big role in the management and the strategy of the company that they have invested in.
There are three major types of private investments that you can explore as a business today.
Here is a simple break down of each of them:
Private Equity Investors
A private equity firm is an organization that collectively raises money from individuals and puts it together for the purpose of investment. Private equity firms will have fund managers who make investment decisions on behalf of individual clients.
The managers charge a fee each year. Private equity firms range in size in terms of the capital they have access to. They are also in a continuous process of raising new money by signing up new individual investors.
All earnings made through private equity investments are distributed as a dividend to individual shareholders. It is also important to note that, when an investor buys into a private equity firm, they are not essentially buying into the investment that the firm has already made. They are simply buying shares into the firm with the hope that, once the investment grows, they will get a return through dividends and capital appreciation. This is a great option for private investors looking for new projects.
Private Angel Investors
Angel investors are often informal in nature. They are very affluent individuals who provide capital for startups. In most cases, an angel investor will get ownership equity in exchange for that investment. In addition to this, angel investors often give financial assistance to businesses during their infancy or initial stages.
This is where the risks are high and access to other forms of capital is very difficult. Angel investors provide expertise and mentorship too to the new entrepreneurs in an effort to help them grow. If you are looking for private investor capital, this is a great place to start.
Peer to Peer Investors (P2P)
Peer to peer investors (P2P) are loan providers more than equity investors. This is where individual lenders give money to businesses in terms of a loan. Although peer to peer negotiations may sometimes lead to equity investment, in most cases they are structured as a loan payable over a certain period of time and with a predetermined interest rate.
The challenge with peer to peer investors (P2P) is that you won’t get a lot of capital unless of course, you take money from more than one individual. But they offer a quick and simple alternative to raising money for your company. In case you don’t know how to find private investors, this option would work.
How and Where to Find Private Investors
In case you are not sure where to find private investors, don’t worry. Access to capital in the current economy is not as difficult as it used to be. Small companies have a wide range of investment options to go for.
Here are a few ways you can explore to secure private investment:
Family Office and Investment Conferences
Family office and investment conferences are designed to bring together potential investors and companies that need capital to grow. These conferences are always an ideal place to network and can give you access to a wide range of private investors in one single go. The only thing you need is to mingle and explain what you do to as many people you can meet. If you still need more on how to find private equity investors, you can even engage with fellow entrepreneurs and see what you can learn about how they have raised capital so far. Knowing important players in the private investment niche can be a big plus in your quest to secure an investor. Family and investment conferences make things happen for you.
Recommended: World’s Largest & Most Influential Gathering of Family Wealth.
Federal Government Programs
The US Federal Government, for example, has established the Small Business Investment Company or SBIC program that looks to provide capital for emerging startups in the country. There could also be other state-level programs like this one. Although getting capital from the government is not always an easy thing, it’s an option worth exploring.
Crowdfunding websites can also give you access to a wide variety of investors. The sites are designed to use the collective efforts of individual investors to raise enough money for a startup. In most cases though, crowdfunding will require a very strong PR and marketing campaign to raise enough awareness on what you are doing and why it may be a good venture for an individual investor. Just like peer to peer lending, it’s very hard to raise large sums of capital through crowdfunding. However, with a unique idea and a clear proof of concept, you can be one of the few exceptions we have seen in recent years.
Family and Friends
Finally, it may also be a great idea to talk to family and friends and see if they can spare some money for your business. Convincing a family member or a friend to invest in your business is a little easier compared to a complete stranger. If you have friends or a family with deep pockets, you may not even need private investor loans to get started in your business.
Private Real Estate Investors
Real estate is one industry where the involvement of private investors for real estate has been on the rise. Real estate investment can be quite lucrative but there is also an element of risk. Nonetheless, private investment offers an easy option to secure the funding without too much paperwork. Private real estate investing can be divided into two categories. Here is a breakdown:
Private Hotel Investors
The hospitality industry is a huge billion dollar business. The demand for hotels is always on the increase.
However, investing in a hotel is not easy. This is an investment that requires massive amounts of capital. But private hotel investors can help in this case. And it’s not just in hotels. Many commercial developments in real estate including malls can be financed through private capital.
Private Home Investors
Private investment can also be used to fund residential real estate development. We are talking about homes and apartments. Normally, private equity funds large developments not just one single home.
This is a massive financial undertaking though and in some cases banks may actually be involved. In addition to this, private mortgage investors can cut across various aspects of real estate development. From funding contractors to the developers themselves, there is simply no limit as to what this money can do.
Private Investors for Small Business and Startups
The role of private investors in small business and startups is quite massive. The great thing is that all types of private investors, including private angel investors, private equity, and peer to peer lenders have all been involved in financing businesses. However, angel investors have largely made a mark in the tech startup scene.
With the exception of P2P lending, in almost all the other cases, investments will lead to equity. In other words, investors will be buying into a given percentage of the business as part of the deal to finance them. Private investment is seen as the most ideal alternative to bank finance and it offers a number of benefits.
Here are some of them:
• It’s very easy to negotiate a deal with a private investor. This means that both parties can walk away from the table knowing that they have gotten a great deal.
• Access to capital is unlimited. As long as there is enough evidence to suggest an upside for returns, private investors will always be ready to put up more money for the success of your company.
• You also get more than just money. Private investors also give you contacts and mentorship to ensure that all your business goals are achieved in the long run.
• The terms of most private investment deals are very simple and easy. You just give up equity and not all of it. If your company becomes successful, you can still be sure there’s something left for you even with private capital.
Private Film Investors
It is also possible to get private investment in the film industry. The movie business has its risks no doubt but it’s also one of the most valuable industries in the world.
So, how does it work? The filmmaker will pitch the movie to an investor first. If the investor is impressed with what they hear, they will fund the production of the film. After the movie is released, a certain percentage of all the revenue it generates will go towards private film investors.
This is not very common these days because there are so many capable studios in Hollywood that can fund any film production.
But for small producers who may lack the needed financial muscle, using private equity is seen as a great idea. It gives talented filmmakers the chance to showcase their work to the world without having to deal with the constraints associated with production costs.
Generally, when private investors put up money they will want equity in return. But it doesn’t always have to work out this way. It’s possible to get a private investor who is not interested in equity investment. Instead, they will extend a line of credit to a business which will be payable over a set period of time and with a set interest rate.
Think of it as a normal bank loan only that, instead of getting it from a faceless corporation, you will be getting it from an individual. The great thing about private debt for businesses is the fact that you can negotiate the terms directly. This allows you to get an incredibly better rate compared to what you’d normally get from a bank or a loan shark. Besides, just like private equity investments, you will still be able to benefit from the expertise and the contacts of your investor.
How to Raise Capital
The first step towards raising capital from private investments is developing a good pitch. The pitch needs to be very precise and straight to the point. You will also need to find these investors. It’s not like they fall from the sky. Using family office and investment conferences could be a good start. Networking with fellow entrepreneurs and learning what they are doing to raise capital may also give you some ideas.
Try to also decide what you are willing to give in exchange for the investment. You must be as flexible as you can. Don’t forget to determine what you want. Investment is not just money. You also need an investor that adds value to your business in terms of the expertise and the experience they bring to the table. Finally, you don’t have to focus on one single private investor. You can get as many as you want as long as they bring value to your business.
Private investments can be a transformative force in your business. The great thing is that over the years we have seen the rise of a wide range of private investment options that can be used by startups and small businesses. Start taking advantage of them today!