Who Invests in Private Companies and How Do You Reach Them?
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Raising equity capital is hard work -- and it always will be -- but now is an unrivaled time to be an entrepreneur seeking financing. Thanks to the general solicitation exemption adopted in September 2013 by the Securities and Exchange Commission, entrepreneurs have access to an unprecedented selection of tools and resources to help them raise investor funding for their startups, growth-stage companies or small businesses.
The emerging online investing (or equity crowdfunding) industry is connecting entrepreneurs to a growing pool of active private investors. Who’s swimming in that pool? The usual suspects, plus some investors you may not expect.
Venture capital and private equity firms.
Institutions remain the most active force in the private investment market. In fact, now is one of the better times in recent history to seek institutional capital: More than $33 billion of venture capital funding has been invested through the first three quarters of this year, already exceeding the full-year 2013 total of $30 billion.
Tip: Reach them through networking and exposure.
Private equity and venture capital firms are highly selective and rarely accept unsolicited applications, so a personal introduction is the best way to set up a meeting. Yet even if you do, be wary. Despite record levels of activity, most firms invest in a very small number of the companies considered.
Putting a capital raising online may help a company land on a venture capital or private equity firm's radar. Firms are increasingly injecting subsequent capital into startups that have successfully raised funds through general solicitation or rewards-based crowdfunding.
Ultra-high-net worth investors have used private investments to diversify their portfolios for decades. According to the Institute for Private Investors, those with $200 million or more in assets allocate on average 2 percent of their portfolios for direct investments in private companies. Online platforms are giving those super-rich investors access to a wider variety of private opportunities than was previously accessible.
Tip: Reach them by getting to the ones holding the purse.
Above the uber-rich are the private money managers and family offices allocating their investments. According to Bloomberg, more and more such firms are collaborating to pool investments directly into private ventures rather than working with costly intermediaries like private equity fund managers.
But like the ultrawealthy clients they serve, family offices are notoriously private. Breaking through to reaching them is a major challenge due to the closed-door nature of their business.
Generally, angel investors are a more approachable, accessible source of capital than venture capital firms or the super-wealthy. Many angels invest, in part, to support economic development in their communities, so they are more publicly available in a broader array of geographic areas than private investors. Texas was the third most active U.S. region for angel investing in the second quarter of this year.
Tip: Reach them by apply, pitch and repeat.
Traditional angel groups accept applications from entrepreneurs and select a small number to pitch at in-person events. (Use the Angel Capital Association directory to scout such organizations in your area.) Some angel groups are moving the process online by partnering with Internet platforms and creating private “deal rooms,” where investors can review curated opportunities without face-to-face meetings or geographic restrictions.
The largest market for potential investors in private capital is as-yet untapped: the estimated 8.4 million U.S. accredited investors who are inactive in private investing. (About 8.7 million households qualify as accredited, but only about 3 percent invest privately each year.) That’s changing, however, as more investors become informed and active.
Reach them by showcasing your strengths and yourself.
General solicitation is disrupting private finance by giving entrepreneurs access to the untapped 8.4 million, but there’s no one-size-fits-all approach to appeal to them. Some investors like high-risk, high-reward opportunities; others are chasing yield. But they all care about the fundamentals. If you host an online raise, attract investors by showcasing your company's traction, growth potential and exit strategy.
Your contacts are your best leads, so motivate accredited investors you know to prompt them to furnish capital. And use videos and webinars to help newcomers become acquainted with your company. When asked their “most important reason for choosing an investment,” 78 percent of respondents to a survey by my company, EarlyShares, selected the “management team.”