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Investor Funding: Private Investors, Private Placements, VCs, and Angels

By Denis Jakuc

At some point in the course of establishing or growing your business, you may seek funding from private individuals, private placements, venture capitalists, or angel investors. Entrepreneurs usually approach investors after their startup or expansion has been launched. That’s because investors like to see evidence that your business concept is viable and has the potential to grow.

Depending on your business’s stage of development, you may have to put together some or all of the following:

  • A complete evaluation of the Business Opportunity, including potential market size, operating costs, and funding needs
  • An Investment Pitch that tells the business story
  • A complete Business Plan or at least a draft of one. You could use LivePlan or Gust, a free planning platform used throughout the investment community for presenting early-stage companies
  • A short-term to medium-term Action Plan that shows what you will do with the funds raised
  • A Strategic Funding Plan covering the best sources and uses of funds, including funding projections against future valuations of the company, funding needs, and actions you plan to take
  • Updates of your Business and Action Plans to reflect company developments

At every stage, focus on key metrics including market, financial, and product or service performance. Follow the same steps for each funding round. Your key objective throughout is to maintain controlling ownership while acquiring the funding you need for success. There are four types of investor you could approach

Private investors

These are high net worth individuals who typically make more than $200,000 per year and have more than $1 million in investible assets. They want the asset allocations in their portfolios to include some investments in new businesses.

Private investors

are not part of an angel or venture capital investment group, as they prefer to directly invest their own funds in companies and they often provide substantial amounts.

Private placements

A private placement is a common method of raising funds for a business by offering equity shares. Private placements are done by private companies (as well as by publicly traded ones) who wish to acquire a few select investors. The actual private placement is the issuing of stock to an individual, a small group of investors, or a corporation.

Private placements are regulated by the Securities and Exchange Commission (SEC), but the regulatory requirements and standards are minimal. To take part in a private placement, the investor must be “accredited,” as defined under SEC Regulation D section 501(c). For individual investors, this requirement is usually met by having a net worth in excess of $1 million.

The private placement investment does not require a prospectus and, often, detailed financial information does not have to be disclosed. However, the company needs a supportable valuation, business plan, pitch, and a stock structure that permits the sharing of equity.

The private placement is registered with the SEC and must comply with the Blue Sky Laws of any state where funds are raised. Private placements are a good way to raise money from friends, family, and private investors, although you do sacrifice some ownership.

Venture capitalists (VCs)

These are investment firms or individual investors who fund companies they believe are capable of growing quickly and taking significant market share. VCs generally provide large amounts of capital and prefer later stage companies with a record of sales, profits, and viable operations. They normally go for cash positive investments where the product or service is a proven concept.

VCs generally want to see companies grow dramatically—40 percent or more compound profit growth—in five years. Their approach is to invest in a range of companies, expecting that most will not succeed. VCs usually want substantial equity in your firm and a seat or two on the board.

Angel investors

These are wealthy private investors or groups of them who invest in small companies in exchange for a stake in the firm. Angels tend to be more patient with entrepreneurs than VCs, providing their funding for longer periods of time, though usually in smaller amounts.

Angels are generally open to taking higher risks in order to access promising deals before VCs, private equity firms, or institutional investors get involved. Angel groups may form consortiums to provide higher funding amounts.

The Angel Capital Association (ACA) lists groups based in the U.S. and internationally. Also check out the Connecticut-based Angel Investor Forum (AIF). There is a state tax program favoring Connecticut investors, which you can find out about on the Connecticut Innovations website.

If you’d like more help with finding the right solution for housing your startup, InnovatorsLINK offers a detailed Bootcamp course where you’ll learn the details about all your options. Register here

Review the Executive Summaries associated with each course prior to attending the courses.

This Expert Summary is © InnovatorsLINK. For republishing, please contact dlangeveld@innovatorslink.com.

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