How to Evaluate Equity Financing Sources

In past articles, we discussed the things that entrepreneurs must do in order to impress angel investors and venture capitalists in order get secure equity financing. We have discussed business plans and presentations in this line.

But did you know that you must also evaluate the sources of equity financing in the same way that you are being evaluated by them? This is, after all, a two-way street where you are being given the funds to start your business while you are giving the investors a certain amount of control in your company. You should then have a say in the partnership even when you are probably the one most in need of the angel investors or venture capitalists.

Here are a few of the most important steps in evaluating your sources of equity financing. We have to emphasize that these steps apply more to angel investors although you can also apply these to venture capitalists.

Do Your Homework

Just because you have found an angel investor does not necessarily mean that he is the right one for your business. Not only are there many more angel investors in your locality but not everybody can and will address your needs. You must do your homework to determine if the shoe will fit, so to speak.

There are many benefits to researching potential investors of which the most important are:

  • You can make a shortlist of the angel investors with the most potential to actually grant your request for equity financing. Even when one angel rejects your proposal, you can ask for referrals to other angels who may be interested. It must be noted that angel investors will often invest in an industry they are familiar with.
  • You can make a sale pitch tailored to the personality and preferences of the angel investor. We don’t recommend making the same sales pitch to all angel investors in the same way that you don’t give the same cover letter to different employers.

With the information on hand, you can then determine if are willing to work with the angel investors. Remember that angels have the right to actively get involve in your company so if you feel uncomfortable with their management style, you should back out as early as possible.

Do Ask Questions

In the course of your research and during the business presentation itself, you should learn to ask questions. You are, after all, an active partner in the enterprise, not to mention that you are projecting a good leadership capacity that all investors desire to see in their partners.

What kind of questions can you ask? We suggest the following set:

  • What companies have the angel investors been involved with and how do these investments relate to your company?
  • What kinds of assistance and level of involvement do the angel investors demand from the company? Can you work with these demands?
  • What other possible expectations do the angel investors have aside from the monetary aspect? (This is a valid question since not all angels are in it solely for the money but do ask subtly)

You will discover that equity financing is better than debt financing but only when you can build a strong professional relationship with angel investors and venture capitalists. Start now and see what happens.

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