April 9, 2012

The Qualities Investors Look For Before Funding Companies

strong_businessAnyone who has started a successful business knows that at some point the time comes where additional growth requires capital.  At this point you’ve probably tapped out of what you can personally contribute to the business and your friends and family – the second line of funding for many entrepreneurs – can’t give anymore.  It’s great to be at that point where people are literally banging on your door for more product, but at the same time frustrating to not be able to meet their needs because you lack the capital needed to grow the business.   This is the point where many people start looking for angels to come to their rescue.

You may have already guessed that I’m not talking about angels in a literal sense, but rather angel investors.  These are folks who have the capability to step in and invest in small businesses with anywhere from a few thousand dollars to hundreds of thousands or even millions of dollars in some cases.  It should be noted that angel investors are different from crowd-funders in today’s sense of the word.  With the new JOBS Act, crowd-funding will prohibit nonaccredited investors from contributing more than $10,000 (or 10% of their income, whichever is smaller) into a business.   Angel investors, however, are generally accredited investors which means that they are less constrained, from a regulatory standpoint, with respect to how much they can invest.

How Do You Find Angel Investors?

The next question most small business owners ask then is how does one find those angel investors.   This has long been a quandary since there’s seldom been a clear path to connect interested entrepreneurs with solid investors.  More often than not you had to know someone who knew someone who knew someone – not exactly a strong financial model to build your business of off!

Which is why CircleUp is so revolutionary.  CircleUp is an online community designed to help “passionate investors” (as they call them) connect with small private companies.  What makes CircleUp even more interesting is that it is focused on consumer products – things like strong food brands – and not on technology which is where so much of the angel investor time and focus has gone in the last decade.   I had the chance to talk with Ryan Caldbeck, Founder and CEO of CircleUp to find out more about why he believes so strongly in facilitating connections between small brands and angel investors.

“People Like To Invest In Products They’re Using”

Ryan Caldbeck is not a newcomer to the world of helping to  finance small businesses.  He spent seven years as a consumer-focused growth equity investor helping to evaluate and fund companies that had at least $10M in revenue.   That, he says, is the level of revenue most institutional investors require as a minimum before they’ll consider writing a check.   As Ryan toured the country looking for potential new business opportunities, he realized there were hundreds of strong, nationally recognized brands that weren’t able to access traditional funding because they fell below the $10M revenue figure.

At the same time, Ryan realized that there were angels out there who wanted to invest in companies they believed in but didn’t have access into those companies.  “It takes a lot of networking and knowing the right people at the right time,” Ryan says.  “I wanted to build some transparency into the system.”

CircleUp is designed to offer that transparency.  Ryan and his team have created a strong database of accredited investors who are actively seeking to invest their money into small brands they believe in.  These investors have the choice to invest – or not invest if the business is not right for them – in a number of consumer companies Ryan and his team have handpicked and fully vetted.  These are brands that are, in most cases, nationally recognized but are challenged to find the finances to grow.  Investors have the opportunity to contribute capital in the dollar amount of their choosing so, for example, while one investor may only $5000 into Company A, the opportunity exists for another CircleUp member – perhaps someone who has been a longtime user of Company A’s products – to invest more because they believe in the company and the brand.

Qualities Angel Investors Are Looking For

Since this site focuses more on brands and companies that are just starting out, you may not yet be at the point where CircleUp is knocking on your door (but hopefully you will one day soon!). Ryan did however share some of his insights into what qualities make a strong company.  It is these qualities, he says, that investors are looking for regardless of where you are seeking to source your capital.

  • Brand Strength: Are people passionate about the brand?  Passionate brand advocates are people who use the brand and tell everyone they know about it.  Having this type of following is not only good for your sales revenue, but that type of social word-of-mouth marketing is important to investors as they want to invest in companies that have buzz and a low cost method of growing their customer base.
  • Performance Relative to Benchmark: If you’re looking to grow your company to the point where you can seek angel financing it’s important to always be striving to outperform other companies in your industry based on the metrics investors in the industry care about.  For example, if you run a small gourmet grocery store then you should be looking at things like your inventory turns (how often your inventory turns over/sells in a year) and comparing that to the average industry turns in your specific niche in addition to your revenue and profitability figures.
  • Entrepreneurial Passion: Ryan shared with me one example of a company he was thinking of working with that had great sales figures and a strong financial track record but when it came down to it, Ryan says that the entrepreneur’s heart was no longer in it.  For a company to be successful, and for an investor to want to come in and put their money into a company, the entrepreneur has to still believe themselves in the brand and has to still want to wake up every morning and do what’s needed to help build that company.

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2 comments on “The Qualities Investors Look For Before Funding Companies

  • Ken Gustafson on said:

    Just found your site. Very nice info. Questions:
    -Exactly how do you gauge Brand Strength?
    -Exactly where can you find Benchmark Performances? This is usually considered confidential info.
    Thank you.