Once you've completed the essential elements of starting a business, like your business plan, you may need to acquire financing or get investors to share your passion and enthusiasm. The following are common questions from entrepreneurs and business owners seeking funding options.

1.  Where and how do I begin to find funding?

Most entrepreneurs get small sums of money to launch a business through personal savings and loans from relatives and friends. This is done by simply having discussions with each of them and giving them the first opportunity to invest in your new business idea. Lines of credit and even credit cards through your bank may be an option. Government grants can be the next option for many business owners but can be a long and difficult process. Government backed SBA loans are a common avenue but many entrepreneurs need more money than banks or traditional financing institutions are willing to provide, given the risk involved. So, many small business owners turn to other sources for additional funds as the next funding stage, including Angel Investors or Venture Capital firms.

2.  What are the major differences between Angel Investors and Venture Capital firms?

One of the most important differences between an angel investor and a venture capitalist is how they intend to use the funds. An angel investor uses his own private funds and a venture capital firm raises money, usually from wealthy individuals. This difference affects the method and actions of each investor type.

The job of a venture capital firm is to generate the best return for their investors and must rely on their experience to choose which companies have the best chance to accomplish this. Because they are not using their own money, they tend to be more risk averse and conservative in their process of funding startups.

Since an angel investor is providing funding with his own money, the typical angel is a wealthy private individual with prior success in building businesses. Some of these angels invest in startups for the thrill of entrepreneurship, to stay current on the latest developments in a particular field, or are interested in an innovative idea.

Because a venture capital firm has a different investment strategy from the angel investor, they each have different expectations regarding the return from their investment. The venture capital firm realizes startup companies are "high risk" and will want to justify the risk with higher returns; it is not uncommon to require a 25% return.

If your business is already in existence and you simply need more funding to expand or generate revenue, then the venture capitalist would be the best choice. If you need money to launch your business, look into the angel investor options.

3.  What is the Venture Capitalist or Angel Investor looking for?

Competition for funding is fierce. Many firms will fund less than five companies for every 1,000 business plans they consider each year.

One of the venture capital firms suggests five factors for a successful deal. "Management, Management, Management, Market Niche, and the Product." The Management team is the most crucial element because a really good team will find the right niche and then design a product and produce it. The kind of management team that venture capitalists look for is one that has been proven successful in their field. The ideal team would have a CEO that has already built a successful company and is now ready to move on to build another one.

There are a number of review criteria that venture capitalists look for in deals.

1. Most venture capital firms look for productivity enhancing applications of technology and don't want to finance large research projects.
2. It doesn't matter how small a company begins but it must have an excellent chance for significant growth to make the investment worthwhile.
3. Highly profitable ideas.
4. Barriers to Entry - Will the competition take away your business?
5. You must be a dominant player in the market niche.
6. Keep it simple. If you have to rely on a large number of new elements to come into play, the risk increases.
7. You have to show benefits to the consumer, satisfy a true need, and possess real value.
8. As an entrepreneur, you have to be committed to the idea.
9. Exit Strategy - There has to be a plan for the investor to receive his return on investment.

4.  How do I approach the venture capitalist?

When you present to a venture capital firm you are not selling your products, technology, or service - you are selling the opportunity for them to join you in a business partnership. Evaluate a venture capital firm the same way you would evaluate any key management team member; look at the firm's record or experience and accomplishments.

1. Choose the Right One - Firms are often grouped by stage of investment, industry concentration, and geography.
2. Present a Clear Business Plan - If you can’t answer all the questions, you probably aren’t ready to start a business.
3. Be Honest and Truthful - You need to begin this partnership by accurately answering all their questions.
4. Get a Referral - Referrals can accelerate the process and give you a favorable start.
5. Be Flexible - You can often be successful with less funding than you requested.
6. Listen - Entrepreneurs are often reluctant to listen to constructive criticism. Most venture capitalists have the experience to zero-in on "holes" in your plan. So listen, fix the problems and present again.

When you select a venture firm, you are likely to be engaging in a relationship that will last 5-10 years and may be the factor that turns your idea into a successful enterprise. The business plan you present to a venture capital firm will likely be the single most important written document in the early years of your relationship. It will be the vehicle that will project your vision and account for much of the discussion that you will have with them.

Venture firms can only succeed if you succeed!

Additional Resources

We have compiled a list of Venture Capital firms and Angel Investors to assist you in acquiring investment capital. We have identified the industries they are interested in and the level of funding they provide. Click here to view the list.

We have excellent software to help you write your business plan or to develop strategic plans to better market your product or service. Click here to learn more.

Many entrepreneurs and business owners are under time constraints or desire the guidance of a professional consultant. For business planning or strategic planning assistance, we recommend SMR Services at Business Plan Advice.com