Second Stage Business Funding
By Brittany Lorenzi & Carson Fears
Most small businesses aren’t eligible for second stage funding. It’s true, they just don’t deliver the type of rapid growth that big investors are looking for. But maybe your business concept shows great potential. If business is booming and you can’t keep up with demand, or maybe an exciting expansion opportunity appears, it might be time to make a pitch.
This is where second stage funding comes in: your business is undeniably successful, but your current cash flow isn’t enough to fuel the growth. This is the second of a two-part series on business funding. Last time, we discussed a variety of methods used to personally fund small businesses. Those options allow you to maintain full ownership of your company, whereas here you must give up some equity. If you missed that post, you may want to go back and give it a read.
Bear in mind that acquiring growth capital requires a good deal of work. Potential investors will want to see a healthy company with excellent growth potential, as well as competent managers that know their stuff. Start working on your elevator pitch, then have your sales history ready to prove that consumers really want what you’re selling.
A favorite source for second stage capital is angel investment. Angel investors are wealthy individuals that provide growth capital in exchange for portions of ownership in promising ventures. Besides just providing financing, angels may also offer their experience and talent. Many angels are industry-specific, investing in companies in their respective line of work. They tend to be more passionate than ordinary venture capitalists, as they are visionaries who share the same ideas as the founder. Angel investors are easier to work with than venture capitalists. They aren’t bound to strict policies because they invest only their own money. These partners can be difficult to acquire, but here are a couple strategies to help you on your way:
1) Since angels like to keep to a particular industry, look for successful entrepreneurs in your field. Angels like to keep a close watch on things and often invest only in local ventures, so be sure to look for someone near your geographic area.
2) The rise of interconnectivity has made it much easier for entrepreneurs and investors to connect. Angel networks like Funding Post and Angel Capital Association make it fairly simple to get yourself on an angel’s radar. Furthermore, Tennessee is home to some valuable networking organizations, including InCrowd Capital and JumpFund.
Venture capital firms are another provider of growth capital. Venture capitalists are professional money managers that invest pooled funds in growing businesses. Seeking venture capital is similar to finding an angel, but the process is a little different.
Venture capitalists manage other people’s money, so they tend to be less likely to invest in risky ventures. They generally make much larger investments compared to angels, meaning small ventures are unlikely to be eligible for VC money. Big venture capital is for rapidly growing companies that can show excellent growth potential. If you think your venture might be eligible, begin researching VC firms through networks like the National Venture Capital Association, a great resource to find a VC in your region.
Does your business have what it takes? Ask yourself, “With more funding, does this idea really have the potential to take off?”