Entrepreneurs Should Know Their Options for Investment

When COVID-19 hit, there was a lot of concern about the possible impact of scrapping face-to-face business meetings, particularly among investors in startups, such as angel investors and venture capitalists. In both cases, personal interactions can tell investors a lot about the founders and executives who are asking for their money.

If angel investors and VCs curtailed their investing last year, it wasn’t readily apparent. In 2020, VCs themselves poured more than $156 billion into the companies they backed, a 10 percent increase from the year before and the fifth year in a row of record investing, according to the National Venture Capital Association. While angel investment is difficult to measure, the Angel Capital Association’s 2020 report put the number as high as $24 billion.

In particular, venture-capital spending has simply exploded, with 2020 representing nearly double what was given to businesses in 2016. And Chicago is a good place to be looking for these investors: VCs doled out $2.8 billion in the city in 2020, a 21 percent increase over the previous year.

VCs also liquidated more than $290 billion via exits last year, and they are eager to reinvest. If you’re looking for early funding, now is a good time to consider angels, VCs, and even small-business loans through local banks.

Looking to lend

The Small Business Administration reported that banks lent more than $28 billion to small businesses in the 2020 fiscal year, and that doesn’t count any of the COVID-19 relief money. With low interest rates, banks are even taking chances on businesses with negative cash flow but promising upsides.

Individual investors, too, are on the lookout for opportunities. Unlike crowdfunding sites like Kickstarter, in which businesses tend to reward backers with preorder opportunities or gifts, changes in the law in 2016 make it possible for individuals to purchase shares of private companies through websites such as AngelList and OurCrowd. A little bit from a lot of investors can go a long way.

For so long, those hoping to get a business off the ground either had to deplete their own savings or turn to friends and family. While your parents or friends might be willing to back your dream, you’re asking them to take a mighty risk with their nest eggs, especially when there are so many eager investors out there right now.

My advice for those interested in pursuing the VC or bank routes is this: Make sure to play up the tech aspect or e-commerce aspects of your company if they exist. The big gains these investors have made in recent years are tied to innovative software and the ability to connect with customers around the world at the click of a button.

You don’t have to be a tech company, but your tech has to expand your horizons. Grubhub is a food delivery service, but its technology makes it seamless for customers and offers the potential to use it anywhere in the world. That’s appealing to an investor.

Ira S. Weiss is a clinical professor of accounting and entrepreneurship at Chicago Booth and is a partner at Hyde Park Venture Partners.

This column is part of the Chicago Booth Insights series, a partnership with Crain’s Chicago Business, in which Booth faculty offer advice for small businesses and entrepreneurs on the basis of their research.