Small Business Investors: Common Types & How to Find Them

Entrepreneurship is a journey filled with challenges and opportunities. As your business grows, there comes a time when outside support becomes necessary. The right investors can make all the difference between scaling successfully and facing financial strain.

In this article, we'll explore the various types of investors available, the benefits and risks they bring, and how to find the best fit for your business needs.

Before seeking investors, it’s crucial to have a clear understanding of your financial and strategic needs. This will help you tailor your approach to finding the right type of investor and funding method that aligns with your goals.

Also, most investors will likely ask you to explain what the funds will be used for, so it is recommended that you clarify the needs internally first, before reaching out to them. 

Let’s take a look.

1. Capital for Growth & Expansion

If your business is ready to scale, you may need additional capital to:

• Hire new employees: Expand your team to support increased demand or new initiatives.
• Expand your product line: Introduce new products or services to cater to a wider market.
• Open new locations: Increase your geographic reach and customer base.
• Invest in marketing and sales: Boost brand awareness and generate more leads.

 2. Risk Mitigation and Stability

Investors can share the financial risks associated with scaling a business, particularly in industries with:

• High upfront costs: Such as research and development, manufacturing, or marketing campaigns.
• Uncertain market conditions: Economic downturns or industry disruptions.
• Competitive pressures: Intense competition from established players.

By sharing risk, investors can help stabilize your business's financial footing and provide peace of mind, allowing you to focus on core business activities rather than financial volatility.

3. For Research and Development

Funding for research and development (R&D) is essential for businesses that:

• Drive innovation: Develop new products, services, or technologies.
• Stay competitive: Improve existing offerings and maintain a technological edge.

For example, tech startups often require significant investment in R&D to pioneer new technologies or enhance their offerings to stay ahead of the market.

4. For Their Expertise and Connections

Investors often bring more than just money to a business—they also provide:

• Industry expertise: Valuable insights and guidance from experienced professionals.
• Mentorship: Support and advice from successful entrepreneurs.
• Strategic connections: Access to industry networks and potential partnerships.

These resources can be crucial for strategic decision-making, opening doors to new opportunities, and accelerating business growth.

While there are several funding methods available in the market, the common ways to fund small businesses are:

• Friends and Family
• Crowdfunding
• Small Business Loans
• Venture Capital
• Angel Investors
• Incubators and Accelerators

Now, let’s take a closer look at each type of investor for small businesses.

When starting out, friends and family can be invaluable resources. They're often more willing to invest in your vision because of their personal relationship with you, not just the business metrics. This early-stage funding is typically easier to secure compared to other forms because these individuals already understand and believe in your capabilities.

How To Ask Friends & Family

Approaching friends and family for investment requires a delicate balance of professionalism and personal connection. While these relationships can be invaluable, it's crucial to handle the process with care to maintain trust.

1. Present a Business Plan: Show your commitment by sharing a detailed business plan outlining your business model, financial projections, and goals to demonstrate potential returns and build trust.
2. Formalize Agreements: Always put terms in writing to clarify whether contributions are loans, equity investments, or gifts, detailing repayment terms or equity specifics.
3. Discuss Risks Openly: Clearly communicate potential risks, ensuring they understand the possibility of not recouping their investment.
4. Assess Relationships: Only approach individuals with whom you have a stable relationship to avoid potential personal conflicts.
5. Set Clear Expectations: Clearly define what investors can expect in return, be it financial gains, equity, or other forms of return, and outline any attached conditions.

Imagine raising capital while building a community around your brand—crowdfunding makes this possible. It’s a modern way to fund a venture by gathering small contributions from a large audience, all while validating your product and gaining early customer feedback. A prime example of crowdfunding success is Oculus Rift, a virtual reality headset, which raised USD 2.4 million through Kickstarter to support its development and production.

Where To Find Crowdfunding Platforms

Explore platforms like

• Kickstarter: Best known for product-based projects. It is ideal for funding physical goods, such as gadgets, art, or games. It's a rewards-based platform, meaning backers receive tangible items in return for their contributions. Please note that you have to raise 100% of your project to get your funds.
• Indiegogo: Offers more flexible funding options than Kickstarter, including flexible funding (where you keep the funds raised regardless of reaching your goal) and fixed funding (all-or-nothing). It is suitable for a wide range of projects, from creative endeavors to social causes.
• Patreon: Primarily for content creators. It allows you to establish a recurring subscription model, where backers pledge a monthly amount to support your ongoing work. It's ideal for musicians, artists, writers, podcasters, and other creators who produce regular content.
• GoFundMe: Primarily a donation-based platform. It is often used for personal causes, such as medical expenses, disaster relief, or charity initiatives. However, it can also be used for business-related purposes, especially if you're raising funds for a specific project or event.
• Fundable: Offers a variety of funding options, including equity crowdfunding, debt crowdfunding, and rewards-based crowdfunding. This platform is particularly beneficial for startups looking to secure capital by either offering equity stakes or providing rewards to their backers​.

Small business loans are a common way for entrepreneurs looking to fund their ventures without giving up ownership. While they provide flexibility, it's important to understand the challenges and considerations involved.

Where To Find Small Business Loans

Check with local banks, credit unions, and online lenders. Each source offers different types of loans with varying terms and conditions. Additionally, the U.S. Small Business Administration (SBA) provides a range of loan programs specifically designed to support small businesses, which include:

• 7(a) loans: For general business purposes, including working capital, equipment purchases, and real estate acquisition. (Up to USD 5 million)
• 504 loans: For financing fixed assets, such as real estate or equipment. It is a fixed-rate loan (Up to USD 5.5 million)
• Microloans: Smaller-scale funding for general purposes. (Up to USD 50,000)

Venture capital (VC) is a popular funding option for startups with high growth potential. Venture capitalists invest in companies in exchange for equity, providing the capital needed for rapid expansion. Sectors like technology, healthcare, and fintech are particularly attractive to venture capitalists.

For high-growth startups, venture capital offers not just funding but also strategic support to scale rapidly. However, it's important to weigh the benefits against the potential trade-offs, such as equity dilution and increased pressure for rapid growth.

Where to Find Venture Capital

To find venture capital, start by researching VC firms that specialize in your industry or business stage. Networking events, industry conferences, and startup competitions can also be effective ways to connect with venture capitalists. Additionally, online platforms and directories list venture capital firms such as Crunchbase, CB Insights, and PitchBook, helping you identify potential investors who align with your business vision.

Angel investors are high-net-worth individuals who provide funding to startups in exchange for equity ownership. These investors are often entrepreneurs or professionals who invest their own money into promising startups, usually at an early stage. Angel investors can be a crucial source of funding when other options, such as bank loans or venture capital, are not yet available.

Where to Find Angel Investors

Consider joining angel investor networks (i.e., Angel Capital Association) or using online platforms dedicated to connecting startups with potential investors (i.e., AngelList, and StartEngine). Local business events, pitch competitions, and industry conferences can also be great opportunities to meet angel investors interested in your sector.

Incubators and accelerators are programs designed to help startups grow by providing resources, mentorship, and sometimes funding. These programs typically focus on early-stage startups and offer a structured environment where business owners can refine their business ideas, build their products, and prepare for future growth.

Where to Find Incubators and Accelerators

Many universities, tech hubs, and industry organizations host these programs. Additionally, online directories, such as F6S, Gust, and Seed-DB list incubators and accelerators by location and focus area, making it easier to identify those that align with your needs. Applying to multiple programs can also increase your chances of finding the right fit for your business.

Now that you understand different types of investors, it's time to take the next step: finding and approaching them. Here’s how you can effectively find and connect with potential investors.

Before you start reaching out to potential investors, it's important to evaluate whether your current business structure aligns with investor expectations. Your business structure can significantly impact your ability to attract funding and the types of investors who will be interested in your business. For examples:

Sole Proprietorship

• Challenges: If your business is currently a sole proprietorship, you might face difficulties in attracting investors due to the lack of legal separation between your personal and business liabilities. This structure can limit your ability to secure substantial investments or loans.
• Considerations: You may want to explore converting to a more formal structure, such as an LLC or corporation, to increase your credibility with investors.

Corporation (C-Corporation)

• Benefits: If your business is already a C-corporation, you're well-positioned to attract venture capitalists and angel investors. This structure allows you to issue shares, making it easier to offer equity in exchange for investment.
• Considerations: Ensure that your corporate governance and regulatory compliance are up-to-date, as investors will scrutinize these aspects closely.

Limited Liability Company (LLC)

• Benefits: Operating as an LLC can offer a balance between flexibility and credibility. Many investors, especially angel investors, find LLCs appealing due to the legal protections they offer.
• Challenges: However, if you're seeking venture capital, you might consider converting to a C-corporation, as VCs typically prefer structures that allow for issuing stock.

Reach Out to Your Circle

With a solid business structure in place, you’re now ready to take the next step in securing funding by reaching out to those closest to you.

Your inner circle—friends, family, and close acquaintances—can be a valuable resource when seeking investment for your business. Not only might they be willing to provide initial capital, but they can also help you explore other possibilities by leveraging their own networks. When you approach your inner circle, consider the following strategies:

• Tap into Their Networks: Beyond their own investment, your friends and family members may have connections to other potential investors, mentors, or industry experts. These connections can help you reach beyond your immediate circle.
• Ask for Referrals: Encourage them to refer you to others who might be interested in your business. A warm introduction from someone who knows you best can carry more weight than a cold outreach, increasing your chances of securing a meeting or further discussions.
• Leverage Their Expertise: Utilize the skills and knowledge within your circle. Whether it’s financial advice or marketing tips, their expertise can be invaluable as you prepare to approach other investors.
• Create a Supportive Ecosystem: They can also help promote your business by spreading the word within their communities, helping you build early momentum and credibility.

Expand Your Network Locally and Online

Expanding your network is essential when searching for investors, as personal connections often lead to funding opportunities. Here’s how to make the most of both local and online networking:

• Attend Local Events with Purpose: Instead of just showing up, prepare by researching who will be attending and identifying key people you want to connect with. After the event, follow up to keep the conversation going.
• Get Involved in Your Community: Regular involvement in local business associations or entrepreneur groups can help establish you as a familiar face. Building these local connections can lead to introductions to potential investors who are interested in supporting businesses in their community.
• Maximize LinkedIn’s Potential: On LinkedIn, focus on creating a strong, professional profile that highlights your business’s achievements and growth potential. Join relevant industry groups where investors might be active and contribute to discussions to showcase your expertise. Don’t hesitate to reach out directly to potential investors with a personalized message explaining why your business aligns with their interests.
• Utilize Online Networking Tools: Consider using platforms like AngelList for startup networking or participating in virtual industry conferences. These platforms can provide access to a broader network of investors who might not be reachable through traditional local events.

Explore Local Investment Opportunities

Local investment opportunities can provide targeted support and funding. Here’s how to tap into these resources effectively:

• Engage with Angel Investor Networks: Many cities have local angel investor groups that regularly meet to hear pitches from entrepreneurs. Research these networks and reach out to learn about their criteria and how to get involved.
• Participate in Business Competitions: Entering local hackathons or business plan competitions can offer more than just funding. These events are often attended by investors looking for new opportunities, and winning or standing out can significantly boost your visibility.
• Leverage Regional Development Funds: Some regions offer grants or low-interest loans to businesses that contribute to local economic development. Check with local government or economic development agencies to see if your business qualifies.

Join Crowdfunding Platforms

Crowdfunding platforms offer a modern way to raise capital while also building a community around your business. To make the most of this approach:

• Craft a Compelling Campaign: Success on crowdfunding platforms hinges on telling a compelling story. Create a strong narrative around your business, focusing on the problem you’re solving and why your solution is unique. High-quality videos and visuals can significantly boost your campaign’s appeal.
• Engage Your Audience Early: Don’t wait until your campaign launches to build an audience. Start generating interest through social media, newsletters, and community events before you go live. Early momentum is crucial, as campaigns that show strong initial support are more likely to succeed.
• Choose the Right Platform: Each crowdfunding platform caters to different types of projects and funding models. For instance, Kickstarter is great for creative projects, while platforms like Fundable are more suited for equity crowdfunding. Make sure to choose a platform that aligns with your business’s needs and goals.

Approach Traditional Lenders

Finally, traditional lenders remain a viable option for business funding. Before applying for a loan, gather your financial records, create a detailed business plan, and be prepared to offer collateral if needed. This will show the lender that your business is stable and can pay back the loan.

Remember, finding investors is a journey that requires persistence and a well-crafted pitch. Start by identifying the type of investor that aligns with your business goals. Once you’ve found the right fit, craft a targeted pitch to secure their support and drive your business forward.