Venture capital and ‘angel’ investment seems like an attractive alternative to personal loans – you’re asking people to invest their money in your business in exchange for a share of the profits. While it can cost you more in the long run, it means that you won’t be borrowing money as a loan that needs to be paid back whether your business makes a profit or not.
Venture capital is the ‘big’ option – you should only really be looking at it if your home business concept is technology-focused and would be able to make a bigger profit if you had access to better hardware. Venture capitalists mainly look for businesses that have the potential to grow really big really quickly, but will also want everyone involved to be experienced and confident.
Approaching a venture capitalist is a lot like approaching a bank to ask for a loan, except you need to be a lot more convincing. The person you meet will be a specialist in whatever industry you’re planning to enter, and they’ll run a mile if you don’t seem one hundred percent sure of everything. Make sure you research any venture capital company before you meet with them, to see what they look for and who their existing clients are.
Remember that you’re being scammed if they ever ask you to pay anything, and be wary of anyone who insists that they won’t sign an NDA (privacy agreement) before they see your idea – they might be planning to hand it to one of the companies they’ve already invested in.
Be prepared for competition for venture capital funding to be fierce. Really, the best way to get it is to build a good version of your business on a small scale and then wait for them to come to you. Also, you should be aware that accepting venture capital funding will give the venture capitalists a significant say in how your company is run. They will try to force you to grow the company as large as possible, before cashing out somehow, whether it’s a sale or selling shares. They will, effectively, take over your company and maybe help you get rich – not too much fun if you’re out to start your own business and get away from the typical corporate way of working.
Angel investors are like venture capitalists on a much smaller scale. They are ‘real people’ – individuals who will invest in smaller companies. For home businesses, angel investors are a much better idea than venture capitalists.
Angels tend to behave more like a business partner. They’ll invest, say, half the start-up funds, and then take a personal role in the day-to-day running of the business. This contrasts with venture capital companies, which have a tendency to be faceless and issue you written demands to be get more profitable. A business angel brings with them experience and knowledge as well as money, and they can be a great asset to your business.
Still, you need to remember that they’re in this to make a big profit – when you build your business with the help of an angel investor, you need to be able to show to them how they’re going to be able to get twice as much out of the business they put in, and how soon. This doesn’t necessarily mean that your business needs to grow rapidly, but it does mean that whatever you plan to spend their money on needs to be some kind of tool for making back far more than the original investment over a relatively short timeframe.
Of course, the best way to stay completely independent is to avoid accepting any outside investment. If you really need the funding, though, there are still some ways to take it and stay as independent as you can.
Make sure you keep at least 51% of your business. However many investors you have, you need to keep hold of 51%, otherwise it’s not your business any more. Don’t feel like you’re entering some kind of big system where you’re lucky to be and you have to play by these people’s rules – if you have a genuinely good business plan, then they’re the ones who should be begging you for the opportunity to invest for such a good return. If all else fails, you might be able to persuade your friends and family to invest just as much on far better terms.