Why Angel Investors Can't Invest in Your Local Business

Hey, guys, Matt Paulson here. In this video, we are going to talk about venture capital and angel investing and what types of businesses venture capitalists can fund and what types they can't. Hopefully clear up some confusion about what types of capital you should be seeking for your business. There is unfortunately a lot of confusion about how to raise money in your business. And, you know, it just comes from a lack of education. You know, should you get an SBA loan? Should you try to get an angel investor to give you money? Should you go looking for a venture capital firm? Should. Should you do a Kickstarter? And the answer is always kind of, it depends. It depends on how much money you have. It depends on the type of business you're running, depends on how much revenue you have in your business today. It depends on a lot of different things. As the chair of Falls Angel Fund, I end up to get. I have a lot of new entrepreneurs that come and say, hey, can we sit down? I'm looking to raise money. I don't know what I'm doing. Can you please educate me? And, you know, I'm happy to take those meetings because there's just, there's no book that you can read that or information on the Internet that you can really read that kind of tells you all the options for raising money, especially in the Great Plains. I did personally make a resource that you can check out on my website that over, you know, gives you an overview of some of the options. But you really kind of do need somebody just to look at your business that understands the fundraising landscape and said, well, maybe, maybe try this. So in the best case scenario, you have somebody like me or Tom Eitram at the Enterprise Institute or Mark Slade at the Small Business Development center, somebody like one of us look at your business and say, maybe this is the route you should look at. But in this video, I want to walk through one of the misconceptions that a lot of entrepreneurs have. I have this same conversation at least once a month. The same misconception comes up. And the question, I guess business owners or entrepreneurs assume that a venture capitalist or an angel investor can invest in really any type of business, as long as it's something that excites them and think that they'll make money off of what ends up happening is that a lot of people who approach me and ask for funding, they tend to wind up being disappointed. That Falls Angel Fund or pretty much any other angel investor or venture capital firm, we cannot write checks to fund local businesses. I can't fund a restaurant I can't find a local retail store, I can't fund a local entertainment venue. Some of these things are very great businesses, but it just doesn't work in the model. The math doesn't work out. And I want to walk through that with you guys in this video. So angel investing, as you know, is a very high risk, high reward proposition. My assumption is that angel investors, this is the same assumption that everybody operates off of. But the idea is that out of every 10 businesses that you invest in as an angel investor, seven of them are going to go to zero. That means you lose all of your money, another two of them will break even, so you get your money back. And then one out of 10 of them will be a home run where you make a whole lot of money, make up all your losses, and hopefully make some money after that. So effectively, out of every 10 businesses that I invest in, two are awash. So that means there's kind of eight left. Seven of them will literally give me no money back. And that means the one business that does well needs to have return on investment of 700% just for me to break even. So that means one company really needs to just shoot the moon, do really well. And that's how I make money. Or maybe I don't make any money because it is a high risk, high reward kind of thing. So if I need 1 out of 10 companies to invest, make 700% ROI, it just doesn't make sense to invest in a retail store or a restaurant or an entertainment venue or anything that's just a local service, anything like that that may operate with a 10% or 20% profit margin. So if I invest in a restaurant or whatever that gives me, you know, operates on a 10% profit margin, I get a 10% return on investment in my venture capital. The money I put in every year, it's going to take 70 years to make up all of those losses. So, you know, I need to get that 700% ROI. They're giving me 10% a year, 70 times 10, 700. It would take 70 years for a restaurant to make up for all the losses from the other companies. So the math just doesn't really work out. Unfortunately, the reality is that if I'm an investor that is willing to take on the high risk associated with venture capital, I need to be able to achieve the just outstanding investment returns that a startup can offer. Sometimes starting any kind of business is a very risky proposition. And I honestly think the risk level might be about the same. Regardless if you're opening A restaurant or if you're doing a new tech startup. So for me to get a positive return on investment in my entire portfolio and be able to keep investing in startups, I have to target those companies that might be able to offer outsized returns. But if you are a small business, you are looking for funding, there are other options that you should look at. A venture capitalist, angel investor probably isn't the right answer for you, but certainly the SBA has programs that you can use where you can get a bank loan and then have that backed by the SBA so that the bank will lend you the money. Because if you don't pay, the SBA will because they basically insure your loan. Also, if you're starting a franchise business, franchise companies tend to have financing options. Certainly you can use your own personal financial resources to start a business, or you can borrow money from friends, family, the proverbial friends, family, fools. There are also organizations in South Dakota, certainly the Small Business Development center, the Enterprise Institute. They can also look at your businesses and tell you about what options for fundraising in your business that you might have that you might not even know about. But it's probably not a good assumption to think that somebody will just give you all the money that you need to run your business in exchange for a percentage of your company or will give you a loan for the entire thing. Typically, anybody that is going to give you money, whether that's debt or equity financing, they're going to want you to bring some of your own financial resources. The assumption that I can just start a business and have somebody else pay for it. Typically that's not always the case. Typically that is not the case. Anybody that's going to invest in you is going to want to see that you've got skin in the game and have put your own money in the company as well. If you don't have any money, that means maybe, unfortunately you shouldn't start a business yet. Maybe that means you should go get a couple part time jobs and work your butt off so that you have some venture capital of your own to put into a business. You might not like that answer, but that is the reality. So hopefully this video will help you understand what types of businesses that angel investors can put money into, what type we can't and hopefully kind of point you to some other resources if you fall into the camp of businesses that can't raise money from a venture capitalist. Hopefully you guys are enjoying these videos. This is about the 15th of these that I've done this year. My goal is to do 100 of them in 2019. So if you like these videos, certainly subscribe on YouTube. The channel name is Business Talk with Matt Paulson. Also, you can get them emailed to you if you sign up on the email list on mattpulsen. Com, so certainly do that as well. I'll see you guys in the next video.