Investors come in many sizes, colors and flavors. Finding the one that can fit your needs is the challenge. Investors seem to have similar characteristics to a banker but with a difference…investors take risk. In return an investor expects a higher rate of return on his money than a bank. Sophisticated investors will calculate an “internal rate of return” (IRR) which may be as little as 12% and as high as 25% or more. It depends on their assessment of the risk/reward picture and what their appetite for risk is.
One class of investor is the angel investor which is usually a silent partner who has some affinity to you or your project. Look close to home for this one. Perhaps family and friends will step up. Sometimes there are community members who do this. Work your networks.
Another class includes various types of investment pools that will have criteria that define the type of business or sector they will participate in. These will be sophisticated and demanding partners. You must jump through some serious hoops to access this money. All the business planning material you prepared for the bank must be in order for these guys as well. But there is more. You must be able to make them understand your business model and help them trust you. They will invest based on the people they see managing this project. Once they are satisfied you’ve defined a market space with products and services that make sense, they will look at the management and ownership to see if they want to partner up with you. If you’ve never done this before, you should consult with a lawyer or other expert on financial structuring.
Venture capital funds are similar to the investment pools above but generally have tougher rules. Like the other funds they will generally look to structure an exit from the business that may be in three to five years. This means they want a plan that meets their IRR goals in that length of time and they are bought out. Think about this as their primary need. Your need is to have their capital to work your plan. Their plan is to get a return, get out and move on to the next thing.
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