6 Types of Investors Every Startup Must Have
There are 6 types of investors for startups for those in need of start-up capital. Friends and relatives, crowdfunding, accelerator programs, angel investors, and venture capitalists are some of the available funding sources. Investments are made by each organization at different times and with varying amounts of money. There are several factors that will need to be taken into consideration when choosing an investor for a new business.
With their investment in a startup, investors are effectively purchasing shares in the business. They are pouring money into the firm in exchange for equity: a share of the company’s future income and a role in its success. Let’s furthermore understand how investors help startups.
Understand startup funding and investors
This group of forward-thinking individuals is so enthused that they decide to develop their early idea into a business. That desire, however, will necessitate counsel from experienced entrepreneurs who have developed successful businesses in the past to achieve it. Additionally, there’s the issue of money.
Early-stage investments provide potential firms with the cash flow they need to get moving toward an IPO and look at the different sorts of investments and when investors are most likely to encounter each one. Securities, such as Apple stock or a government bond, are examples of intangible assets like equity investments and convertible investments. Physical investments such as diamonds or real estate are considered tangible assets.
Why do startups need investors?
One of the most important factors in a company’s success and growth is the involvement of its investors. Because of this, it’s essential for businesses to establish good, open connections with their investors. Consequently, investors provide a lot more than money to a company. Factors such as money, terms, relationships, competence, and a company’s brand all have an impact.
Types of investors every startup must have
The bootstrapping technique, in which individuals pool their personal assets and incomes to fund enterprises, is a popular one, although it might be unrealistic or even impossible in some cases. More often than not, new businesses are forced to turn to investors for financial assistance with their endeavors. The most common type of investors are:
Banks and investors
Some small enterprises turn to banks for financing to aid with initial expenditures. It is now more challenging to get a bank loan because of the 2007 mortgage crisis. Having firsthand experience in the sector or a solid, well-versed mentor in the industry helps. As much startup capital as feasible may be required, along with collateral such as a home equity loan.
Investors are important to a company’s success and growth. As a result, organizations must establish strong, transparent relationships with investors. First, they will provide startup funding. Second, they help with a business plan. Thirdly, they are profit-driven and will guarantee capital is invested properly. As a result, they encourage you to manage your firm carefully.
In most cases, you need a detailed business plan that includes:
- A clear and thorough summary of the operational business
- Product or service descriptions that focus on the company’s most important offerings
- Preliminary estimates of the financial situation
- Forecasts from the top-level management
- Goals and strategy to achieve them
Additionally, you must demonstrate financial responsibility to prove that you can be trusted with their funding.
While you may have never considered approaching friends and relatives for investment in your firm, this is a popular strategy. Indeed, personal investors account for a larger portion of the pie than any other sort of funding source, investing over $66 billion annually on average $23,000 per project.
This strategy is optimal for funding a new business startup. On the other hand, personal investors can benefit from long-term investments due to their loyalty and passion for the business. According to CNN Money, personal investments, like any other sort of investment, should be governed by a contract. This may mitigate the risk associated with merging businesses and families. Ascertain if your familial bonds are strong enough to stand apart from the commercial relationship; for example, you may endanger both your loved ones and your own cash if the venture is less successful than anticipated. Sign a promissory note outlining the loan’s terms, as well as a separate partnership agreement if one is contemplated.
To approach private investors who may be friends, family, or neighbors. You may be required to provide them with:
- A cover letter.
- An elevator pitch or a summary of the opportunity.
- A business Plan and financial statements
- A presentation of your pitch deck.
Venture capitalists invest millions of dollars in a business in exchange for being a shareholder (referred to as equity capital). The investment is based on the assumption that the equity capital will appreciate in value over time and that the investor will earn a profit on their initial investment. This type of investor is often interested in businesses with a strong business plan and has already succeeded.
Venture capitalists are an excellent source of funding for entrepreneurs. You’ll need to demonstrate a strong business plan and a high-profit margin. VCs frequently play an active role in the company’s future and may place a premium on income above the founder’s original goal. Consider drafting a formal partnership agreement with a venture capitalist that spells out each party’s rights and responsibilities. While venture capitalists occasionally serve as mentors, they are typically more involved in operations. It is preferable to be directed to venture capital opportunities via a mutual acquaintance. For instance, you can solicit existing investors to discuss your firm with their networks in order to expand your funding prospects.
In order to pitch to a VC, you should have the following:
- A pitch deck: brief managerial skills, basic financial forecast, and product photos are included in this 6-minute pitch presentation.
- 1 page executive summary in two columns: information about the industry, introduction, management team, advisors, funding raised and quantity sought and used. One wide column of business description, problem or need, a solution supplied key attributes, and basic financial forecast.
- 10 page or less business plan including product photos or screenshots and 2 pages of financial information (1-page financial forecast for the first year and 1 page for years 2-5 with cash flow).
Angel investors are typically successful entrepreneurs looking to leverage their riches by investing in projects close to their interests, particularly companies that may struggle to obtain more traditional kinds of finance. Many angel investors are accomplished entrepreneurs, corporate executives, and business experts.
Unlike other funding sources, angel investors often take an active role in the company’s operations. Do your research before approaching an angel. Make sure any potential angel investors have a strong reputation and the expertise and contacts to help your firm flourish. This investment is usually a loan or a stock purchase. They sometimes mentor or advise the company they invest in. Some angel investors, for example, focus on a certain industry, such as emerging technology.
Similar to VCs, you would need a pitch deck and executive summary that answers the following questions:
- What market opportunity/problem are you pursuing?
- What is the market size (money, audience, and any industry-specific leading indicators)
- Who is/are the competitor(s)?
- What is your competitive advantage/differentiator?
- Projections of revenue and gross margin with user uptake
- How much do you want, what will you do with it, and when do you plan to launch?
- Who are the members of your team? What are their qualifications?
A promissory note details the terms of an angel investor loan. Angel investors might pool their funds through angel groups to make larger investments.
Disruptors are companies that have the potential to fundamentally alter or disrupt established businesses and industries through startup fundraising. These companies may have cutting-edge technology or operations that make raising capital for the greatest startups easier. As a result, you might approach a fundraising disruptor for assistance in connecting you with important investors.
Along with the finance process, fundraising is important for firms. When these fundraising work in tandem, they offer a great deal of potential to help a startup flourish. Whenever an investor begins supporting a startup on a small or large scale, they must arrange their actions around the business organization’s objectives. However, funding strategies differ according to the type of outcomes desired by the firm.
You would need a fundraising pitch that holds – a cover page that should state “Confidential and Proprietary”. [Name of Company] copyright. Reserved”.
- Persuade the viewer of the market opportunity.
- Include eye-catching visuals and imagery.
- Send the PDF pitch deck to potential investors ahead of time.
- Plan to have a product demo during your in-person presentation.
- Do tell a story that demonstrates your enthusiasm for the company.
With five-figure campaigns becoming increasingly popular, this funding approach is becoming increasingly popular among entrepreneurs trying to acquire initial capital.
When we talk about crowdfunding campaigns that are still going on, we need to remember that it is a great way to get your name out there and let people know what you’re working on. Most of the time, this is a marketing strategy that works. You get support from people who may not invest in your project but will tell their friends about it. Despite the fact that campaigns might fail, there are additional benefits in conducting one that can be used to market a product, enhance pre-sales, and test price.
There are various paperwork that must be completed for a crowdfunding campaign to be successful. These documents contain a business strategy, executive summary, pro forma income statement, and pitch deck, among others.
Due to the fact that crowdfunding platforms may operate across borders, international laws apply as well, notably in connection to money laundering and counter-terrorism. Kickstarter, Indiegogo, and RocketHub, the three major platforms, have all achieved complete compliance with international anti-money laundering legislation. Reaching out for expert advice is recommendable.
How to approach VC and Angel investors?
How to approach investors like VC and Angel investors has become quite a demanding factor for many startups because of the prominent role they have for young entrepreneurs. Attracting them is key in getting capital to aid a business that’s just starting out. But, just how do you go about reaching out to them to help your business?
- Angel investors – When approaching an angel investor, the ideal strategy is to make a personal introduction. Find a mutual friend or acquaintance who is willing to promote you on LinkedIn, your professional and personal networks. If you don’t already have a contact, look for them at conferences and industry gatherings. Make a phone call and see if you can organize a meeting. You don’t have to ask for money at the outset. As a business owner, you need to know that any investor you team up with is a good fit for your company.
- Venture capitalists – In order to approach VCs, personal introductions are more effective. Because venture capital firms are large organizations with extensive networks, establishing a shared bond should be easier than with an angel investor. Startups frequently approach these companies, so be prepared to move quickly if you do receive an introduction. Send a reading deck the same day you exchange business cards, and never enter a presentation pitch without additional paperwork prepared to send if the venture capitalist requests it. Sometimes, VCs and other investors may look for a business valuation to see how well your company is doing.
Attract investors by getting a business valuation from Eqvista!
In order to achieve long-term success, it is vital to identify the most significant investment for your company among those listed above. Understanding the benefits of each investor, as well as the influence their engagement will have on your company, is essential for long-term success. One way to boost your chances of getting investors for your company is to have a business valuation. Eqvista is one of the leading players in business valuations and we are more than happy to help. Contact us today for more information on our valuation services.