Small business owners are always on the lookout for new sources of funding. So when I saw the headline on CNBC recently “For small biz, hedge funds are the new banks,” I had to find out what all the excitement was about.

Traditionally, hedge fund investors have always looked to reduce the risk of investing and get a good return on their investment. Since banks are trying to lure small businesses back for loans, but are slow to respond to small business needs, hedge funds are seeing opportunity for greater returns by dabbling in private markets. The money isn’t only for growth businesses: Even some startups are attracting interest from hedge funds. With more flexibility and an ability to give greater valuations, hedge funds are scoring some of the deals you would expect a VC to go after--Snapchat, for one, received a $50 million round of financing from a hedge fund.

Could hedge fund financing be an option for you?

Be prepared to ask any investor you approach the following questions:

  1. When was the last time you made an investment? Make sure the investor is actively pursuing opportunities.
  2. What is the typical amount small business receive? Make sure you and the investor are on the same page when it comes to dollar amount.
  3. What is your typical decision-making process? Will you get an answer soon or face a long wait?
  4. What are the other investments in your portfolio? You should be able to find this out before you have a meeting.
  5. What kind of interaction do you want with companies you invest in--hands on or hands off? Hedge fund investors tend to be hands off, which could be a good or a bad thing depending on what you’re seeking from an investor.

If hedge fund investors aren’t right for you, there are many other alternative financing sources out there. Your SCORE mentor can help you learn more. 

About the Author(s)

Rieva Lesonsky

Rieva is CEO of GrowBiz Media, a content and consulting company specializing in covering small businesses and entrepreneurship and SmallBizDaily.com.

CEO, GrowBiz Media
Hedge Fund Financing