Types of Investors for Startups
Startup investors don’t just hop on any bandwagon. You can choose among those investors who are not only willing to cooperate with you but corresponds to your requirements and needs.
It is also crucial for you to know to which startup investors you can pitch.
Once you have understood whom to pitch to, you can develop your case. It is like before showing down, you must know all the cards your opponent has.
And don’t forget that every kind of investor also has a limit. Let’s consider all available options of different types of investors for startups.
Angel Investors
An angel investor is a person who provides you with money to develop your product. Usually, angels offer you funds without exchange on a share of your startup.
However, angel investors could ask you for a share or provide you with money as an interest-free loan.
There are different types of angel investors. It can be even your family or friends, or your boss if you work as an employee. Also, there are serial angel investors.
In contrast to venture capitalists, angel investors are not high-scale investors. Their investment potential is lower than the one of the venture capitalists.
This type of investor helps at the early stages. Usually, they are pre-seed or seed rounds.
BalanceSMB states that angel investors expect to receive up to 25% ROI (Return Of Investments). That means, for each invested $1, the startup should return $1,25.
Since angel investors get a lot of startup pitches daily, it is not easy to reach them. And that’s why it’s essential to know who you are looking for.
According to Ralph Kroman of WeirFoulds LLP, the typical angel investor:
- Has an income that exceeds $100,000
- Is 40 to 60 years old
- Has a net worth over $1,000,000
- Has previous successful entrepreneurial experience
- Expects to hold on the investment for up to 5-7 years (although some angels wish to “cash-out” after only a few years)
- Enjoys advising the entrepreneur and likes to be part of the action
- Invests up to $150,000 but may participate in a syndicate of other angel investors to multiply the individual investments
- Refers deals to other private investors even if has chosen not to invest
- Enjoys investing in an industry with which is familiar
- Sources deals through referrals
Angel groups are also an expanding trend. A group of angel investors cooperate and form a pool of their capital. It allows them to invest more and bear a collective risk instead of an individual.
Business Incubators and Business Accelerators
You have definitely heard about startup incubators and accelerators. But what are they?
A startup incubator is a program curated by non-profit organizations or private foundations with the only goal to help entrepreneurs to grow business. It is commonly associated with universities and business schools.
An incubator provides founders with direct and indirect investments.
The primary incubators’ help as an indirect investment is a coworking space, a working infrastructure, a network of mentors, and educational courses.
Startup accelerators are like the next level of incubators. They provide the same benefits of cooperation as mentorship and networking. However, accelerators are mainly focused on getting seed funding.
Seed accelerators work as a batch-based program. Each batch finishes on Demo Day when startups pitch to potential investors.
The main benefit of being accelerated in such structures is networking. Simply because most of the angel investors often support business incubators at their local level. So, it is definitely an excellent option to reach out to your investor.
Here are a few promising accelerators that you can approach in the US:
- California — Angel Pad, Y Combinator, 500 Startups, Alchemist Accelerator, Google Launchpad, and Expa;
- Colorado — Techstars;
- Montana — 406 Labs;
- New York — Startup Health and Dreamit Ventures.
Venture Capitalists
Venture capitalists or VCs are private investors who give funds to startups in exchange for equity. They aim to return on investments significantly.
Such investors provide a considerable amount of money to let your project grow as rapidly as possible. However, there are many hidden risks for an investor, as startups always act in unpredictable conditions.
But if a startup performs well, VC will receive a massive return.
Venture capitalists are giants of the startup investment industry. They will provide you not only with money but also with network and top-notch mentorship.
Unlike angel investors’, their investment criteria are even more rigorous. They check the startup’s history, the founder’s story, and all the figures and metrics.
CB Insights has listed the top 100 Venture Capitalists firms. Some of them are Accel, Benchmark, and Index Ventures. Also, Sequoia Capital, Founders Fund, and GGV Capital.
There are various forms of venture capital funding. They can provide seed capital and startup capital. Also, they can give early-stage capital, expansion capital, and others.
It depends on the current stage of the startup and how the investors want to proceed further.
Corporate Investors
Corporations can also be startup investors.
They need to diversify their existing companies’ portfolios while offering capital investments. Moreover, it’s easier for corporations to buy technology than create their own app from scratch.
Just remember the Instagram case. Facebook bought the company. We can view that purchase as investments since Instagram still exists and grows.
Moreover, the corporations run their own accelerators and incubators. So, they open the door to gaining extra benefits and privileges. If you are considering taking things to the next level, go for it.
But we must warn you. The corporate investors have their own way of working and collaborating. That’s why you should learn how they operate before approaching them with your startup idea.
Tech.co listed 15 corporate accelerators. Some of them are AT&T Aspire Accelerator, Budweiser Dream Brewery, Cisco Entrepreneurs in Residence.
Government and Banks
The banks and government agencies are reluctant to provide capital to early-stage startups. But getting various sorts of credit facilities becomes available only after your startup has gained some traction.
Funding institutions that are run by banks and government usually set several restrictions and prompt repayment schedules. And these restrictions impose an unnecessary burden on startups, especially at a time when they need the most considerable slack period.
An excellent example of startup investment banks is Japan’s Softbank. It has shares in some of the most prominent startups of the 21st century — Nvidia, Uber, The We Company, Talkspace, Boston Dynamics, and many more.
All these tech startups have made a splash across the globe. And the fantastic thing is that they are funded by a bank, not by some Silicon Valley Venture Capitalist firm.
Government-based investors also provide investment for startup businesses that have specific projects. But, it doesn’t mean that every startup with such a project will get the required capital.
Even then, the founders may need to develop an unbeatable pitch deck to acquire the funding.
If you want to find some government investors around, google your location and nearby accelerators. Local incubators are a common form of cooperation with startups.