The right financing source might make or break your business. Identify the type of investors that are most suitable for you.
Once you decide to grow your company as a startup, the amount of money you need to support the scale-up often exceeds what your current business can afford. That is why financing from different types of investors serves as a short in the arm and may help your company take off not only through the capital injection but also through the added expertise and network.
Below are the nine types of investors that are most commonly utilised in the startup world.
- Venture capital firms
- Angel syndicate
- Personal investor
- Government agencies
- Retail investors
- Family office
- Corporate venture capital
1. Venture capital firms
Venture capitalists are private equity investors who make investments through venture capital firms (VCs). They invest in high-growth businesses in exchange for a share of the company’s ownership.
People or organisations who finance these VCs are called Limited Partners (LPs), including pension funds, endowments, foundations, finance companies, family offices and high-net-worth individuals. LPs have limited liability up to the extent of their investment and do not involve in the day-to-day management of the fund.
Meanwhile, individual professionals who are responsible for making investment decisions for the fund are called venture partners, or operating partners. They also generally take board seats in your startup after the investment.
Cheque sizes:US$200K – US$350M+
Angel investors are individuals who provide capital to early-stage startups. They are usually wealthy entrepreneurs who have a yearly income of more than US$200,000 or a net worth of more than US$1 million.
This type of investment is usually made in the form of a loan or a stock purchase, together with the advisor role of the angel. Since the deal is often brought up in between the startup’s first round of funding and a venture capital attempt, it yields high returns when the company scales up but also imposes high risks as most businesses fail at this stage.
Angels often invest in groups and form a network to keep track of new deals within the industry.
Cheque sizes: US$10K — US$30K
3. Angel syndicate
According to an explanation by Keystone Law, an angel syndicate is defined as a group of investors who agree to invest together in a particular project. It can be set up by angels or investees with funds that are drawn from any source.
An angel syndicate is led by a lead angel investor who coordinates the syndication and sits on the board of the company after investment.
Cheque size: US$25K – US$100K
4. Personal investors
Friends and family often support founders with their money, which turns them into personal investors.
Personal investors take the lion’s share among all sorts of financing sources, contributing more than US$66 billion yearly and an average of US$23,000 per project.
Since the loans or investments come from a close relationship, it is important to separate family and business, as well as state clearly the contract and terms prior to officially employing this investor type.
Cheque size: US$2K— US$30K
5. Accelerators & Incubators
Accelerator programmes provide a set timeframe where firms spend from a few weeks to a few months working with a group of mentors and experts to supercharge their business and avoid mistakes. Some of the most well-known accelerators are Y Combinator, Techstars, and The Brandery.
Startup incubators start with businesses or even single entrepreneurs, and they will not follow any fixed timeline. While some incubators are independent, others are funded or maintained by VC firms, angel investors, government agencies, and large enterprises, among others.
If accepted into one of these programmes, the startups may receive from US$10,000 to Us$120,000 in seed financing to help them develop and market their product, and access to extra information and resources.
Cheque size: US$10K – Us$120K+
Banks are a traditional financing vehicle and ranked fifth among the most common funding sources for startups, according to Dealroom.
Leveraging the finance industry, banks often invest in fintechs that can add to banks’ service offerings. Some banks also set up their venture arms to focus on startup investments. In this method, banks can be considered corporate investors.
However, it is notoriously difficult for early-stage startups and small enterprises to access banks’ funding as the startup needs to provide proof of a revenue source or collateral before its application is authorised.
Cheque size: Not specific
7. Government agencies
There are government initiatives that provide funding for certain projects. They will not compel the firm to give up any stock, but they will have an influence on its profitability.
Startups are often qualified for these grants and schemes based on the government’s qualifying requirements, which might be difficult for new businesses to overcome. With this in mind, entrepreneurs should carefully consider what those expectations are beforehand to fulfil during their development.
Cheque size: US$10K – Us$120K+
8. Retail investors
Retail investors can be understood as non-institutional investors that include almost everyone who uses a broker, bank, or real estate agent to acquire and sell debt, equity, or other investments.
These individuals are not investing on behalf of others. Instead, they are managing their own funds. Personal goals, such as planning for retirement, saving for their children’s education, or funding a significant purchase, are the driving forces behind this type of investor.
Business strategies to attract sums of funds from a large number of retail investors might be known as crowdfunding (as in early-stage companies) or initial public offering (IPO) (as in mature companies).
Crowdfunding uses social media and crowdfunding platforms to connect investors and entrepreneurs. This type of investment works best for social media-savvy and B2C firms, which can employ the network effect as well as the customer base. When customers enjoy a product or service and believe in its future development, startups may take advantage of the potential to get initial funding to launch their product.
The majority of crowd funders are between the ages of 24 and 35. The average amount raised per campaign in the crowdfunding sector will be US$127,466.
Cheque size: US$50M+
9. Family offices
Private wealth management advisory firms that service ultra-high-net-worth people (HNWIs) are known as family offices. They offer a full package of services, from budgeting, insurance, charitable giving, wealth transfer, investment, and tax services, to managing the assets of an affluent individual or family.
Since family offices are growingly interested in investing in startups, working with them might be extremely different depending on who is in charge of the investment choices and processes.
For this type of investor, taxes, long-term intergenerational investment, status, and income may be more critical than for other types of investors who are seeking a faster exit.
Cheque sizes: US$200K – US$10M+
10. Corporate investors
An incorporated business that chooses to invest in another firm is known as a corporate investor.
Big corporations may profit from investing in startups by bolstering their own growth figures and diversifying their holdings.
Some corporations also put financing into outside startups through investment, merger or acquisition. Some even establish their own accelerator and incubator programmes, as well as an ecosystem, to help cultivate these prospects.
Cheque sizes: US$200,000 – US$67B