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A passionate and motivated person will often want to develop a startup business to market their exciting new invention or idea. If this sounds like you, then you may be a great person to develop a startup business. A startup business is typically centred around a new invention or idea, unlike a small business, which usually enters a pre-existing market. However, starting a business, especially one centred around a new idea, can be a very costly venture. Moreover, sourcing investors to help you with funding for your business can be tricky. This article will outline how to find investors for your startup so you are able to choose the best source for your business.

Who Can Invest in My Business?

Your new startup will go through a few different stages as it begins to get off the ground. In the beginning, family and friends or angel investors are a safe option for seeking funding. Once your startup is slightly more established, you can seek venture capitalist funding, a bank loan, or public market funding.

Family and Friends

You can ask for money from generous family and friends. However, this could complicate personal relationships as you are mixing business and your personal life.

Angel Investors

If you want an investor that does not put your personal relationships at risk, angel investors are a great way to bring in money for your business. Angel investors are usually successful business people who want to use their money to help smaller startups. This is sometimes known as seed funding. Often, these investors will take a hands-on approach and share their expertise as well as capital.

Many online networks provide opportunities for people to find angel investors for your New Zealand startup that are easily accessible.

Bank Loans

You can secure funding from a bank or a finance company for your startup. However, you will have to pay back this money with interest over time. In addition, given that many startups struggle to succeed, banks will often require the loan to be personally guaranteed by you and your co-founders. Often, this will be secured using personal property (for instance, a family home). Therefore, providing personal property as collateral can be a significant risk for a new business owner to take. Consequently, bank loans are typically more suited to established businesses or people with significant business experience. 

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Venture Capital

Venture capital is also a common form of funding provided to new startup companies. Usually, venture capitalists tend to reserve their investment for companies that they predict will be high-growth (such as tech and software companies) or are slightly more established. In addition, the New Zealand government has been proactive in taking measures to support local businesses, due to many people taking their businesses offshore after failing to secure investors in New Zealand. Therefore, the government has developed several firms to encourage people to invest in local businesses.

One of them is Elevate NZ, formerly known as the Venture Investment Fund. This program has a fund of $300 million which is invested directly into venture capitalist firms, and aims to fill the gap during the early and middle stages of funding for high-growth tech companies.

Funding from the General Public

Finally, you can seek funding from the general public. Many startups receive funding from members of their communities who want to see the business grow. Additionally, some businesses are able to successfully crowd-source from the wider public for initial funding. Furthermore, some larger businesses or other organisations may provide some sponsorship to help get your startup off the ground if your values align with theirs. 

Equity vs Debt Investment

It is essential to know the distinction between equity and debt investment. These are the two main kinds of funding provided by investors, so you should understand the distinction when looking for people to invest in your business. 

Usually, the funding provided by investors is known as equity funding. This funding is provided in exchange for a share in your company. This means that investors will be entitled to some of the future profits of your business. However, this also means that they will have to share any losses that your business suffers. Commonly, people providing equity funding are either:

  • experienced business professionals who understand the risks of investing in businesses; or 
  • are personally known to the company and therefore understand it and the risks associated with any investment. 

Thus, you are under no obligation to pay back investors if your startup faces challenges and fails. 

Next, debt investors will loan your company money, which you will have to pay back over time. Though you will have to pay the investor back with interest, they will not receive shares in your company and are less likely to receive a large payout if your company is successful.

Key Takeaways

If you are a hard-working, entrepreneurial person, you may be the perfect candidate to develop a startup. However, getting money for your new business venture can be a challenge. Finding investors is an essential step for your startup business. You may be able to ask friends or family or seek a traditional bank loan. However, you may have to risk personal property or relationships when seeking these types of funding. Therefore, angel investors are a great source of funding for your new startup. There are several networks in New Zealand that aim to connect angel investors and new startups. Finally, when your business is slightly more established, you may be able to use government networks like Elevate NZ to help find venture capitalists who can provide funding. 

If you need help to find investors for your startup, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0800 005 570 or visit our membership page.

Frequently Asked Questions

Is a bank loan the best way to get money for my startup?

Though most people have personal experience getting a bank loan, it may not be the best way to finance your startup. Banks are often reluctant to grant loans to startup businesses because they see them as risky. They may also require you to put personal property on the line as collateral, which can be difficult for business owners. Thus, angel financing, family and friends or venture capitalists may be more suitable investors for your new startup. 

Do I have to pay back all types of investor funding?

No, you only have to pay back debt investments, as the money is offered to you as a loan. In the case of equity financing, you are granted the money in exchange for a share of the business. This means you lose control of small parts of your business, but you do not have to repay the money at a later date.

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