In order to create a startup business, entrepreneurs need money. There are many different types of investors that provide capital for small businesses. Angel investors are one such type.
Knowing what an angel investor is as well as the advantages and disadvantages of angel investing can help entrepreneurs decide whether or not an angel investor is right for their startup business.
What Is An Angel Investor?
An angel investor is a person who invests in business startups and growing businesses. Angel investors expect a higher rate of return than traditional investors. In fact, many angel investors look for a return of 25 percent or higher.
Angel investment is a type of equity financing, which means that the angel investor expects shares in the business in exchange for the money provided. For a business that is still small and relatively unestablished, or for a business that has yet to be established, equity financing is often easier to secure than a small business loan.
Who Can Be An Angel Investor?
Often, angel investors are relatives. Many people feel more comfortable asking family for money, and often find it easier to secure investment through family. However, there are some disadvantages to securing angel investment through family members. When businesses fail, the disappointment and loss of money can have a negative impact on familial relationships. Angel investment from family members works best when family relationships are strong and families trust one another.
Angel investors can also be wealthy people who are seeking a business to invest in. Sometimes these wealthy people are personal acquaintances or friends, other times angel investors are found by word of mouth and through community connections. Sometimes angel investors take the form of a group of people who pool their money and invest in the company.
Benefits of Angel Investment
Angel investment is less risky than traditional debt financing. In fact, if the business fails, angel investors do not have to be paid back. Angel investors invest in businesses because they have an interest in securing a share in a long-term business venture. They do not expect to be paid back immediately because they expect to get their money back in time, as the business thrives.
Disadvantages of Angel Investment
For many business owners, one of the most obvious disadvantages of angel investment is the partial loss of control over the future of the business. Angel investors have a share and a say in the future of the business, and usually expect to exercise that right. For this reason, it’s important to match the right angel investor to the right business owner. Business owners and angel investors should have similar ideas about the future of the business, and how the business should be run. Angel investors also receive a portion of the profits if the business is ever sold.
Establish a Healthy Business Relationship
The best way to ensure success between an angel investor and an entrepreneur is to establish a healthy business relationship. Communication is key. Before finalizing the investment, the angel investor and the entrepreneur must come to an agreement about the investor’s role in the business and the future of the business itself.
It’s important for the entrepreneur to have a business plan in place before these discussions begin, so the angel investor can understand the direction that the business is going. Talking out these issues can help the angel investor and the business person decide if the relationship is right for them.
Many small business need to stay lean while still undergoing expansion. Successful small business owners expand a business as necessary, while factoring in their budget and potential profits from the changes. Start-ups, entrepreneurs and small business owners can benefit from taking time to strategically grow their business and meet new demands. What suggestions can be used to grow a small business on a budget?
Perform Market Research
Though not all business strategies are suitable to businesses of every size, small businesses should take note of big business strategies when looking for guidance on how to manage their companies. Like many larger companies, underperforming small businesses or those that are seeking out additional growth should perform market research on their demographic.
One way to differentiate oneself and see more growth may be to target a segment of the market aggressively. This was done by Pepsi when it was losing out to Coca-Cola, and a focus on a younger demographic helped it to become more successful. Likewise, some energy drink companies all follow the same path and target the same demographics.
A small company may do best to go deep rather than broad to build a loyal and steady customer base from a smaller niche, rather than by scattering their energy too much and casting a broader net. This means that a small business should know their main competitors, identify underserved areas and develop a strategy to service that corner of the market.
Revisit a Business Plan
Small business owners would do well to create and revisit a business plan. This document serves as an outline of objectives and strategies that will be used to achieve goals. It generally covers a framework that will help govern growth and management over a three-to-five-year period. As marketing and financing are generally addressed, it can be a benefit to any business owner to dust off their plan and reassess original strategies. Original goals can be forgotten when a business gets busy or when it seems that there is always something else that needs to be fixed or addressed. This may be a sign that it is time to get back to the essentials.
The business plan is not set in stone but can be adjusted to meet current needs and should be reviewed on a regular basis. This can help a small team to redefine their strategy, align their marketing plan with business objectives, use resources in ways that show demonstrated growth and look for new ways to get additional financing. Those looking to grow their business often need a formal business plan to present to investors or to use with lenders. A realistic revenue estimate as part of such plans can help small businesses get additional funding and decide when it would be best to implement new changes in a business.
Look for Financing
Crunch those numbers. Is it possible to make changes needed without additional funding? Many small businesses need more funds at a different stages to promote new products or services, grow their team and serve more customers. Small business may want to seek financial assistance from the U.S. Small Business Administration (SBA) or additional options such as banks and credit unions. Some may want to look for working capital loans from an alternative online lender. These are all options to help fund growth in an expanding small business.
These tips can help small business understand which areas to target for growth and find new ways to finance their operations and meet business goals. Cover these basics, including having and coming back to a business plan, in order to assess the potential of any changes under consideration.
Any small business owner who neglect the opportunity to build relationships may be missing a big opportunity to boost profits. If so, it’s time to take a new path to alter marketing tactics in some old-fashioned ways. It’s all about effective follow-up, according to Entrepreneur magazine, and it’s the new marketing rage, even though it’s based on old principles. It might require an attitude adjustment, however.
Build On Existing Relationships
Guerrilla marketing relies on time-tested methods to court customers, seek referrals from satisfied buyers, consistently boost the dollar amount of individual sales, and increase the number of transactions per customer. Why? Because the primary rule of marketing is that getting a new customer costs six times as much as keeping an existing one. When the budget is tight, it follows that the way to increase profits is to start with the customers that already exist.
The basic rules of guerrilla marketing are:
- Put aside competitive tactics in favor of cooperation
- Focus on dialogue instead of monologues
- Build relationships rather than counting sales
- Address individuals, not groups
- Perfect and practice follow-up strategies
Guerilla marketing provides value by focusing on the “you” rather than the “me,” by offering interesting information, new insights, additional services and pertinent advice rather than simply promoting products and advertising prices. In short, it’s a way to connect with the customer in a world where much of that connection has been lost.
Strive for a Personal Touch
No matter where you spend your marketing dollars, the approach should be multi-level and targeted. But it’s vital to understand what really drives sales.
There are numerous ways to to modernize marketing efforts, but first consider this: Seventy-five percent of small companies place at least part of the blame for ineffective marketing on data that isn’t current. Making decisions with outdated data undermines those important marketing efforts. And overloading customers with email blasts and unwanted discount offers is counterproductive.
If the budget is limited, resort to old-fashioned means. Use the telephone; write a blog post; post a picture. Get personal. Send a letter or send an email, but keep it conversational. Consider holding an informational class, workshop or demonstration; participate in a street fair or charity project; create a simple brochure; revamp your existing website. Always direct traffic back to your website so that potential clients can find all the necessary information to make buying decisions on their own time and in their own way. Assure that those decisions can be based on facts and good information rather than hype and impulse. It works!
Audio, Visual and Action-Packed
Social media tends to be graphic and far-reaching, and boosted posts that are easy on the budget can be used to great advantage. Promoted posts are deemed effective by more than 60 percent of the B2C content marketers who say they use them. Branch out into infographics and, if appropriate, think about videos, tours, “how-to” demos or “expert” discussions. Become social media savvy if you’re not already.
Customers appreciate being involved in the afterlife of the products and services they purchase, and most customers appreciate hearing from other buyers about their experiences. Ask for referrals and testimonials. Post them on your website. Respond to all questions, complaints or criticisms you receive. Keep your word; stand behind your promises.
Marketing may be different in today’s fast-paced world, but basic principles are the same. Treat customers with respect, and they are likely to become customers for the long term. That’s the basis of guerrilla marketing.
As more and more conglomerations spring up across the nation, it can make small businesses feel like they have to play an awful lot of defense to keep up in a competitive world. But it’s clear that too much fear in a business will force people to make decisions based on self-preservation or even desperation in the worst of circumstances. To keep the entrepreneurial spirit alive without over-stretching the workforce, it may be time to shift gears to a healthier culture.
No matter how many studies emerge about the importance of taking breaks or about how flexibility can be a boon to workers, there’s not nearly enough of it being practiced in offices today. Tech start-ups are often laughed at for having cases of beer in the fridge and a virtual reality room for developers who want to take a break. But they haven’t necessarily jumped the shark as much as onlookers may think.
If employees feel chained to their desk, they may get a lot more done in the short-term. But in the long-term, company owners are only setting themselves up for a higher turnover rate. Both the direct and indirect costs of hiring and firing an employee can far outweigh the disadvantages of giving employees a lot more freedom in how they do their jobs.
Cut the Negativity
Think negative coworkers just need a few pep talks to get back on track? Owners may want to rethink this assumption if they’re trying to deal with a negative but otherwise productive co-worker. Negativity has a tendency to spread to co-workers at a high rate—even crossing departments or echelons of power. Chronic bad moods not only affects other people’s mood, they also affect the overall productivity of the office. Because negativity is a core trait, owners may be better off separating the employee than they are keeping them around.
Letting people work from home has become a much more viable option today as technology continues to improve, and some studies suggest that it actually helps people get more done on a regular basis. High-productivity workers are far more likely to leave a small business than they are to be dragged down with the negativity around them.
Define the Culture
Workers today want to be connected to the ideals a business espouses. In fact, they may put this priority higher than that of their salary and benefits. Small businesses who have a mission and who stick to it can make it far easier for employees to keep a sense of perspective of what they’re trying to do. Rather than feeling as though they’re on an island, they can actively connect to a much larger purpose.
Owners can do this by telling stories that illustrate how the company is demonstrably meeting the original goals they set. Accountability and better leadership have a way of improving as everyone gets on the same page. This shift can make those late nights feel a lot more like a get-together than hard work.
No matter how an owner goes about creating the right culture, they need to commit to the underlying principles immediately. Implementing any type of change in an office will never work if the leaders themselves don’t believe in the actions. While it may be difficult to get everyone to agree on everything, there should be a general consensus before ever moving forward.
Inspired entrepreneurs may not realize how important funding is to the success of a startup or small business venture. According to the Small Business Association, the second reason business fail is due to “inadequate or ill-timed financing.” Issues with cash flow can make it hard for a business to stay in the game long enough to take advantage of a future opportunity.
No startup owner wants to shut their doors because they failed to take into account operating expenses or the realistic costs of running a business. It is necessary for any startup to determine how much funding they will need to achieve short-term and long-term goals, how they will use the funds and what they may need to do in order to secure a loan or provide investors with an attractive return.
Understand a few of the options available for entrepreneurs and startups who need financing today.
Depending on the situation, it may be better to secure either debt financing or equity financing. Debt financing allows for individuals to cover the costs of specific needs and often comes in the form of bank loans that will need to be paid back within a certain time frame and at a given interest rate. There are debt financing options outside of bank loans, but this continues to be a funding alternative for startup owners.
On the other hand, there is equity financing. In this situation, a startup trades part of the ownership of a company in order to receive cash from investors. Risk is shared and startup owners have less to lose if a company fails and investors have more to gain if the venture is a success. Make sure that long-term goals of all major parties are in alignment when partnering with investors as they are often highly involved in the company.
Approaching Family and Friends
This may be one of the easiest ways to get money for funding. However, put a plan in place and create a legal documents to spell out the terms of an agreement to safeguard the interests of everyone involved. Formal documents and a business plan can help keep financing agreements professional and may be used when looking for other sources of financing.
Bank Loans or Private Lending
When applicants are not approved for a bank loan, they may want to investigate private lending. This alternative asks for similar information as a bank but they may be more willing to approve applicants for a higher-risk loan. In addition, such lenders generally have more knowledge about the industry.
Those looking for relatively small amounts of capital may seek out the attention of angel investors. Venture capitalists are generally looking to invest $1 million or more. Angel investors can provide an infusion of a smaller amount of capital to a startup or small business.
Plan for Growth
How much money is needed to start and maintain the startup? Can it be operated on a lean budget and what funds will be needed once it takes off? A business plan and assessment of expenditures related to operating expenses, salaries and marketing efforts can help startup owners get a better understanding of the financing they will need to open and grow their business. Some research finds that premature scaling can lead to startup death. Staying lean may be a pragmatic approach to take until significant funding is secured from lenders and there is a need to expand operations.