There is more than one type of investor to fundraise from, in fact, there are eight types of investors. So, how are they different? Which may be a good match and when?
Below is a list with the different types of investors that you could approach for your startup. Once you know who to pitch, it is all about the pitch deck to close your round of funding. For a winning deck, take a look at the pitch deck analysis web site created by nfinitiv advisors. When it comes to pitch decks analysis, we pride ourselves in our understanding of what VCs expect and demand because all our team are made up of advisers, angel investors and VCs.
Friends and family
The first type of investor entrepreneurs should be approaching at the very beginning are friends and family and close personal contacts.
At this stage, there is very little hard evidence and proof to base a real investment or funding on. They are essentially investing in the idea, and far more importantly – you. These are the people that already know you, like and trust you and believe in you the most.
This type of investor may not provide a lot of money. It could be in the range of US$1,000 to US$200,000. Though if you cannot raise money from this group, other investors are probably going to ask themselves why.
Also Read: Chatbot developer startup Pand.ai takes home US$1M seed funding, eyeing scaleups
Banks and government agencies
These are not true investors like the others on this list, but they can be sources of capital. Traditional banks are generally not an easy source of capital for early-stage startups and small businesses. However, as you gain traction, they may offer business credit cards, lines of credit, and business advance loans.
There may also be government programmes providing grants for certain types of projects. That does not mean that bringing in this type of capital will be any easier, and loans require repayment, often when you really need as much liquidity and slack as possible. They will not require giving up equity in your company, but they can impact your profitability, which may show up when you try to raise money from other investors later.
One thing to note about government programmes is that in many instances the come with certain restrictions and limitations which may be burdensome for startups. Founders should review very carefully what those expectations are.
Angel investors
Professional angel investors are normally approached when it comes to the seed round and beyond. They are willing to fund smaller operations than VCs, may be more flexible in terms, and can offer a lot of value in wisdom and connections.
Angel investors can be approached directly online, at live pitch events, and through introductions from other startup founders.
Angel groups
Angel groups have been increasing. They have become more popular and more organised. These are groups of angel investors who band together to make investments in startups. This enables them to invest with more confidence, with larger check sizes, and with lower exposure to risk.
Also Read: Funding news is not public relations: Building your startup’s story world
Accelerators and incubators
These vehicles can ultimately be a gateway to a variety of the types of investors on this list. If accepted into one of these programmes you may receive anywhere from US$10,000 to US$120,000 in seed money to cultivate your idea and gain traction, while benefiting from additional knowledge and resources. If everything is going well, you will be pitching larger investors and be introduced to funding sources during their demo days that can help take you to the next level. Just be ready to hustle, these programmes want to speed you on the way to the next stage quickly.
Family offices
Family offices are increasingly being drawn to the advantages of investing in startups. However, as some of the most successful entrepreneurs have pointed out, as investors, family offices can have quite different interests and game plans. Each can be very different.
Working with them can be very different depending on who is managing the decisions and process. Taxes, long term multigenerational investing, prestige and income may be more important for these investors than others on this list who are pushing to an earlier exit.
Venture Capital firms
VCs are the holy grail of investors for fundraising entrepreneurs. They come with the biggest checks, the most power to fuel success and gaining market share, and most juice when it comes to achieving more credibility and visibility.
More venture capital firms are looking at and are participating in earlier funding rounds. Though it is much more likely these investors will show up and be secured in Series A, B and C fundraising rounds than earlier.
Do note that not all of these firms are created equal. The best match can be influenced by location, the timeline of their funds, their interest and expertise in a certain field, their power to help you get to the next stage and of course, how they treat their founders.
Corporate investors
Investing in startups carries a variety of benefits for big corporations. Including supporting their own growth numbers, diversifying assets, and identifying talent and technology which can help them fend off industry changes and fuel revenues and profits. Some have funds to invest in outside startups. More are launching their own accelerator and incubator programmes and ecosystems for cultivating these opportunities.
These investors can be great allies in taking your business to the next level. Though they can be quite different to work with, and any integration or collaboration on sales channels, systems and customer bases needs to be approached carefully and with a lot of patience.
Founding entrepreneurs and corporate investors often have completely different styles and perspectives. It is going to be vital to learn to understand each other and have some boundaries set up when going in, if this is going to be an enjoyable relationship.
Summary
As you can see from this list, there are a wide variety of very different types of investors for funding startups. Some are very specialised in the stages and funding rounds they will invest at. Though these lines are increasingly blurring. Think of this as a ladder, not an A or B menu list.
As your startup grows different sources of capital will be more advantageous and valuable to fuelling that next level of growth. Understanding these differences will be invaluable for an efficient fundraising campaign and targeting the right investors at each raise.
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A previous version of this article first appeared on nfinitiv.
Image Credit: NESA by Makers on Unsplash
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