Six Tips on Taking Outside Investors

Source: New York Times
Author: By TOM SZAKY

Having a great idea for a company is one thing. Getting the money to get it moving and growing is quite another — especially when you’ve got an unconventional product or business model that your average investor isn’t likely to recognize as an obvious winner.

When we started TerraCycle as undergrads, my co-founder and I entered and won a number of business-plan competitions around America, effectively financing our business from the resulting prize money. The best thing about prize money is that it provides financing without diluting your ownership in the company; the challenge of relying on prize money is that it is relatively limited — $5,000 to $100,000, generally, and you can’t enter the same contest more than once, especially if you do well the first time.

Soon after depleting our prize winnings, we realized we had to find a new path. Because we were nervous about institutional financing, we focused on angel investors, high-net-worth people who can invest anywhere from $10,000 to $1 million. Compared to venture capital investors, angels tend to be more drawn to the mission of the business, and they tend to be more flexible about changes in the business model (an important consideration for TerraCycle, as I wrote in a recent post). And they’re also less likely to get upset when things don’t go well. In part, that’s because their time horizons tend to be longer. While a typical V.C. fund has a three- to five-year time horizon on an investment, most angel investors are comfortable waiting up to 10 years before they see a return.

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