Are you looking for equity investors to grow your business?
If so, I hope you’re not walking around wondering where you can find these investors. Because they’re pretty much everywhere.
Let me explain.
To begin, there are two main types of investors: individual investors and institutional investors.
Individual investors are investors who invest their own money in companies. They are better known as “angel investors.” Institutional investors, on the other hand, are investors who invest their company’s or other people’s money. The largest class of institutional investors for entrepreneurs are known as “venture capitalists.”
Now, the vast majority of entrepreneurs should be seeking angel investors and not funding from venture capitalists. Why? To begin, most venture capitalists won’t invest less than $2 million in a company, which is often too much money for a startup and would cause the entrepreneur to give away too much control of his company. And most venture capitalists won’t invest in companies unless they have already accomplished several milestones (such as having a developed a product, having secured customers, etc.). That’s why many venture capitalists fund companies who have raised angel funding first.
So, while venture capital might be perfect for an entrepreneur later, in most cases, the entrepreneur needs to first raise angel funding. The good news is that it’s much easier to raise angel funding than venture capital funding. According to the National Venture Capital Association, only 2,893 companies raised venture capital last year. On the other hand, according to the Center for Venture Research, 57,225 companies received angel funding. That’s 20 times the number of companies who raised venture capital.
In addition, those 57,225 companies were funded by 259,480 individual angel investors. And further, those 259,480 individual angels are just a tiny fraction of the total number of investors that can provide funding to entrepreneurs.
In fact, according to The Spectrem Group, there are 980,000 U.S. households with a net worth exceeding $5 million and 7.8 million U.S. households with a net worth exceeding $1 million (both figures exclude the value of the household’s primary residence).
That’s millions of potential angel investors. And the best part for entrepreneurs is that these are mostly “latent” angel investors. That means they don’t look at themselves or call themselves angel investors. And they don’t get bombarded with companies to fund. But, they have the means, ability and often interest in investing in entrepreneurs and emerging companies.
And why wouldn’t they? Virtually all of these investors have money in the public stock markets, which have provided flat or negative returns over the past 10 years, while over the same time, angel investments have earned an average of 27 percent annual returns.
So entrepreneurs are actually doing these investors a favor by having them invest in their businesses (if their businesses are solid, of course).
As you might imagine, most of the millions of latent angels in the United States can be easily targeted. They tend to live in certain ZIP codes. And the primary breadwinners are typically business owners and executives who are on multiple lists that an entrepreneur in need of funding can purchase.
A word of caution to the entrepreneur, however, is that the selling of securities in your venture is regulated by the Securities & Exchange Commission. So it is strongly recommended that you use appropriate legal counsel and follow the proper guidelines when raising angel funding.
But once again, the good news is that angel funding is all around you and is accessible to entrepreneurs with a solid business idea and plan.
Dave Lavinsky is the president and co-founder of Growthink (http://www.growthink.com). Since 1999, Growthink has helped thousands of entrepreneurs and business owners develop business plans and raise numerous forms of financing. He can be reached at [email protected].