Complete Guide on Finding a Right Investor For Your Startup
With technology-based companies become a popular part of the business world, hotbeds like New York, California and others are now not the only ones who have technology-based companies. Tech companies are everywhere and it is becoming easier for new companies to get startup funding.
As per the CB Insights, some of the top funding companies in America are tech based startups, which include Kabbage ($490M, incorporated in Georgia), Avant ($655M funding, incorporated in Illinois), OneWeb ($2.2B, incorporated in Virginia), and Magic Leap ($2.4B in disclosed equity funding, incorporated in Florida). So, if you are about to start a tech company, you are going in the right way.
If you’re reading this article, then you might be searching for a way to raise startup funding for your company. As a matter of fact, having knowledge for how to raise capital and connect with startup investors is important. It will be vital for choosing the right investor for your company to secure business in the future.This article would help you with just that.
Kinds of Investors By Company Stage
There are many investment choices that you can select from when you are hoping to get funding for your startup. Depending on where you business is at, some funding options may feel right when compared to others. Other times, there would be cases where you company would mix and match many different investment options in every stage of the company to open doors for multiple diverse capital streams.
Below is a more detailed explanation about the various investment for each development stage of a company:
Initial Stage (When an idea is born)
This is the stage where the entrepreneur is still working on and developing the startup idea. And at this moment, the entrepreneur might need funds to complete some of the main tasks to make their idea work. The tasks can include things like developing the detail business plan, getting the equipment and raw materials to prepare the market trial, and more. And in this stage, the funds are normally raised via close connections or personal finances. Here are some of the startup funding options that you can choose from in this stage:
Friends & Family
A lot of entrepreneurs usually get most of their initial startup fundings from their family and friends. If you are at this stage, then you too can take help from your family or friends. The ones that truly believe that your project can work or the ones who are closest to you and want you to succeed would help you out.
And even though these investors are very easy to handle and you do not have to go through a lot of the legal processes, accepting cash from a close one can create personal stress and tension between you two. Family and friends usually do not check to get a return on their investment, but they would be eager to get their money back when they see your company has grown. So, before you ask them for help, you should think a little or try out the next option instead.
Introducing an idea to an investor wouldn’t help you get funding mostly when you just have the idea and nothing else. So, at this stage, you are the investor. And it is mostly good if you are able to add in the capital for your startup as that is why you are the founder of the company. While investing your own money in a company can be risky, it would also allow you to have total control over the business.
Funding a startup with personal finances in the Idea Stage is also a way to safeguard yourself from debt should the venture not succeed. As the business grows, however, it is likely that you will not be able to sustain it with your own money, and will eventually need to bring in outside investors.
The next stage is the pre-seed stage, where an entrepreneur would need some funding to take their first step towards entering the market. The capital can be used to sustain current growth along with performing tasks that show market validation. Moreover, the entrepreneur can keep using the funds from the last stage along with external funds to start the business on good footing.
That is why this stage has come up to help the entrepreneurs get an option to start off their company on the right foot by gaining a little outside investment. There are some open options in this as below:
One great thing about the crowdfunding option is that it offers an opportunity to almost everyone for gaining investment for their startup. By making use of crowdfunding websites like Indiegogo, GoFundMe and Kickstarter, you would be able to pitch your business idea to the world. This would allow people to hear about what you have to offer and it would give them the chance to donate money without having to give out your equity for it.
In short, crowdfunding is a hands-off approach for startup funding when it comes to affecting your everyday business operations. And even though crowdfunding might not seem like a normal approach, a lot of startups have gained donations from all over the world to start their business.
Incubators / Accelerators
A business that is in the pre-seed stage and has a promising future can apply to any of the accelerators or incubators for obtaining funding. In a lot of cases, when you apply and are selected for one of these programs, you can easily expect to find a state-of-the-art work environment, strong industry connections, business mentorship, and seed funding, if your business is highly promising.
For you to be accepted in a startup accelerator or an incubator can be difficult due to the huge amount of competition. In fact, there is no guarantee that you would get funds from this program as they are designed to help entrepreneurs grow their business. In short, they are used to offer resources in addition to startup capital and mentorship.
You might have heard of startup investors called angel investors. They are a huge part of the private sector. Angel investors are mostly people and not private firms, which is why the investments made are smaller, and range from about $25,000 to $100,000.
In addition to this, these players usually invest in your company expecting to get a much higher return on their investment (ROI) they made. These investors also look for playing a much larger role in your startup other than just offering you startup funding to help grow your company. So you can expect them to have input on the company operations and ask for getting a seat on the board of directors.
The next stage is called the seed stage. It is the point where the growth of the company starts and all of the preparation that was done initially bears its fruits. But there are still challenges in this stage, where the company has to carve out market share and determine ways to make the company successful.
Also, this is the round where the company would try to obtain a large amount of funding starting from $1M – $30M. And for this, you have a few options from where you can get the startup funding, including:
Venture Capitalists (VCs)
These investors are the ones who offer the most amount of startup funding. They are found in the private sector and are usually a group of people. They have a pool of funds from which they can draw money from including pension funds, foundations, corporations, and organizations.
Fast growing companies that have the potential to succeed can easily obtain startup investment starting from $1 million based on many factors. These venture capital investments are common for companies that are technology and biomedical based. And if you are one of them, then these VC firms would play a huge role in your company after you receive their investment.
The main reason for this is because they would get a huge amount of equity of your company in exchange for the funding. Additionally, the VC firm would also keep offering you guidance and expertise throughout the development stage of the company. Just remember that you would need to do a lot of research before you reach a VC and strike a deal with them.
This is another kind of funding and is only available for the owners who have companies that are already backed by venture capital. Venture debt funding is just like a loan, where you would need to pay the total amount back regardless of if the company is successful or not. And in this case, there is no need for you to offer any startup equity to the lenders.
The time for repayment can vary from about three years and onwards, based on the case and the amount of loan taken. As a matter of fact, venture debt is the best option for short-term financing mostly for companies that need to make a one-time purchase and do not have a lot of cash on hand to do so. The purchase can be for raw materials during peak season or a large project for the company’s future.
You should note that if you are about to enter a venture debt agreement, don’t take it lightly. This is because the repayment has to be made on time based on the agreement. If you miss out on repayments, you might be forced to sell your company or liquidate it to cover the amount you borrowed. This is also one reason why people tend to take up investment from startup investors like the VC firms and give up startup equity in its place, as it is a much safer option.
SBA Microloans and Microlenders
In case you are searching for a small investment for your company, a microloan may be the best option for you. One place from where you can get a microloan is the Small Business Administration (SBA). It is a government entity that provides programs to startups that allow private lenders to connect with startups. With this, you can easily find startup investors who can off you with loans of about $50,000.
Other than this, there are some other microlending non-profit programs that you can be a part of. They offer loans of around $12,000. These microloans are perfect for any startup . And if you need more money for the seed round, you would need to meet other investors accordingly.
Where & How to Find Investors?
The only answer to this is – networking. By meeting the right people around you, you would be open to a greater number of opportunities. In short, you would need to make sure that you have a good network to get good opportunities. So, if you are about to turn into an entrepreneur, ensure that you give time and network with people around you and in your industry.
Try to attend every kind of industry event possible, even though you feel you are not qualified for the event or if your business hasn’t been launched yet. Initially, you might not find startup investors, but by networking like this, you would be able to gain a lot of knowledge from other start entrepreneurs and business veterans. You would have to work towards creating relationships that would help you in the future.
Know What You Want for Your Startup
Before you move out and connect with startup investors, you should know what you are looking for based on the relationship you build with them. Maybe you would also want them to have control and guide you towards creating a business. And if this is the case, then you would want to get funding from private equity firms, angel investors, and venture capitalists.
If you are focusing on just getting funding for your business, then it is better for you to get help from crowdfunding sites or microloan options. In short, it is very important to know what kind of investment you need as that is what can help you build your business to make a success. That is what would give your company life!
How Eqvista can help you?
Now that you know all about how you can gain startup funding from a startup investor, you should move ahead and get investments for your company. But as you do it, remember that you would have to keep track of all the shares of your company you give out to investors for your startup funding. For this, you would need a cap table application.
Eqvista is a FREE cap table application that helps you record, keep track and manage all the shares of your company. Along with this, Eqvista would also help you comply with the various legal obligation related to the shares of your company like filing for the Schedule D on form 1040, and getting your 409A valuations done. To know more and try our app, click here.