If you’re looking to raise money to start a business, your first course of action might to go seek out angel investors to fund your business. This works if you’re running a business that has the opportunity to reach national scale, but there are other financing options you should consider if you are developing a local service or retail business.
Prefer to read instead of watch? Here is a rough script I used for this video.
There’s a lot of confusion about how to raise money for your business. Should you get an SBA loan? Should you try to get an angel investor to give you money? Should you look for a venture capitalist? Should you do a Kickstarter? And, the answer is always it depends. It depends on your financial resources. It depends on the type of business you are running. It depends on how much current revenue you have. It depends on a lot of things. As the chair of Falls Angel Fund, I get a lot of of new entrepreneurs that want to sit down and have coffee and ask about fundraising. I’m happy to take these coffee meetings because there’s no book you can read or information on the internet about how to raise money in South Dakota, other than the guide I’ve produced on my website, and you really need someone to walk you through it.
In this video, I want to walk you through one misconception that comes up over and over again about angel investors and venture capitalist. And, that is that a venture capitalist or an angel investor can invest in pretty much any type of business. A lot of people that approach me looking for funding are disappointed to find out that Falls Angel Fund and pretty much any other angel investor in town cannot write checks to fund local businesses. I can’t fund a restaurant. I can’t fund a local retail store. I can’t fund a local entertainment venue. The math just does not work out as an angel investor, and let me walk you through that.
Angel investing is a very high risk, high reward proposition. The assumption that that angel investors have is that 7 out of 10 businesses they invest in are going to zero, that 2 out of the 10 will break even and you’ll get your money back, and 1 will be a home run that will make up for all of the losses from the businesses that didn’t work out. So, out of the 10 businesses, 2 are a wash and effectively didn’t happen because I just got my money back. That means the 1 business that does really well needs to make up for the 7 businesses that fail spectacularly go out of business. That means my one winning business has to generate at least a 700% return on investment just to break even. Now, if I invest in a restaurant or a retail store that operates on a 10% profit margin, it would take that business 70 years to pay for all of the losses from the companies that didn’t work out. Since almost no retail businesses are open for 70 years, it just doesn’t make sense.
If I am an investor that’s willing to take on the high risk associated with venture capital, I need to be able to achieve the outstanding investment returns that a startup can offer if things go well. Starting any kind of new business is a risky proposition. I honestly think the risk level is probably about the same regardless of whether you’re opening a restaurant for the first time or you’re starting a new tech startup, so for me to be able to get a positive return on investment and being able to keep investing in startups, I have to target companies that can offer those outsized returns.
So, if you are a small business looking for funding, there are other options you should pursue. Certainly the SBA has programs that you can use that will allow you to get a bank loan backed by the SBA. If you’re starting a franchise business, sometimes the franchise company will have financing options. Certainly you can use your own personal financial resources to start a business as well or borrow money from the proverbial friends, family and fools. There are also organizations in South Dakota, such as the Small Business Development Center and the Enterprise Institute that can look at your business and tell you what the fundraising options look like as well.
So, hopefully this video will help you understand what types of businesses angel investors can put money into and what types they can’t and provide you some other resources if you fall into the camp that typically can’t raise money from a venture capitalist.