Different type of investors
The information shared here would give you all the details and information about the different types of investors.
Obtaining startup funding for your company is not easy task, but it’s not impossible to secure funding for your company growth. There are constant announcements and daily hype surrounding startups getting funding. And with all the news about the rise in the types of investors, there are many new ways for companies to find funding.
For many entrepreneurs who are entering into the business for the first time, expect to spend about 4 to 6 months to raise the necessary startup funds. The main reason behind this is that not everyone knows everything about funding off the bat, and the different types of investors and startup funding.
Most startup owners depend on investors for funding in their new business. It doesn’t matter if the company is introducing a new product, conducting an upgrade on equipment, or expanding operations, the investor’s capital can offer tremendous support for the company.
There are various types of investors in the market, and in order to figure out the right one to help you with funding your company, you need to be aware of all the different types. This may even end up coming from you, injecting funds into your own business as an investor.
Even though there are many stories about people who fund their own startups by utilizing bootstrapping and putting all their earnings and wealth into a business, this approach is many-a-times too difficult and unrealistic for many starting off. It is normal for budding startups to seek the help of investors that would help them give a proper base to their project and plan.
There are four main kinds of investors for startups which include:
- Personal Investors
- Angel Investors
- Venture Capitalist
- Others (Peer-to-Peer lending)
Generally, the capital from these types of investors is utilized by the company to upgrade supplies and equipment, expand operations, or introduce a new product. Nevertheless, every situation is different, which is why companies should always take precautions before contacting an investor.
Different types of investors
As mentioned above, there are many types of investors who have their own resources, capabilities, and motivations. And you might prefer one type of investor over another depending on the strategy, capital needs and the company’s size. In addition to this, the company preferences would change over time, and the progress of the company would change as well.
In fact, investors are one of the main players in the process of the company, where their level and quality of involvement would determine the success or failure of the company. This is why it is essential to know everything about the various types of investors so that you can understand which to choose and how to approach the right one.
Most business owners usually depend on their close acquaintances, friends or family to help them by investing in their business, normally during the initial stages. These types of investors are called personal investors, and even though they can assist with funding, there is a limit to how much they can invest in your company.
It is often easier to convince a loved one to help you out, but there is heavy documentation that is required for which they can be taxed for helping as well. So, if you are going to take a personal investor’s help, ensure that you consult a lawyer to help you avoid any complications.
Angel investors are those who put their money in small startups or new entrepreneurs. This is the most famous type of investors that most people may have heard about before. An angel investor might even be close to the startup owner, like friends or family.
Angel investment is normally either a one-time off funding for the business to propel, or an on-going investment to support and take the company ahead in the initial stages. Angel investors usually offer much more favorable terms as compared to the other type of investors. The reason is that angel investors invest in the entrepreneur opening a business, and not the viability of the company.
In short, angel investors are always focused on helping the startups to grow in the initial stages instead of obtaining a profit from it. As a matter of fact, angel investors are also referred to as business angels, seed investors, private investors, angel funders, or information investors.
A venture capitalist (VC) is an investor who offers capital to the startups that are believed to have long-term growth potential. Venture capitalists are normally investment banks, well-off investors, and any other financial institutions. Even though this is a risky way for investors to put in their funds, a successful payoff is worth it.
A VC would put their resources into a company that they feel has the possibility to grow, and in return, they would demand equity in the company and get an overall say in the company’s decisions. Since entrepreneurs get both open funding as well as the advice of an experienced and knowledgeable person, many tend to choose these type of investors.
In a VC deal, large chunks of the ownership of the business are produced and sold to some investors via independent limited partnerships which have been built by venture capital firms. At times, these partnerships are made up of a pool of various similar enterprises.
An essential difference between the other equity deals and the venture capital deals is that VC deals normally focus more on growing companies that are looking for an abundance of funds for the first time. So, if you want a lot of money for your startup, along with some long term experience and knowledge, this option is a good one.
Others (Peer-to-Peer Lenders)
Peer-to-peer lenders are groups or individuals who provide capital to small business owners. But to obtain this capital from these type of investors, the owners would need to apply with companies that are experts in peer-to-peer lending, like the Lending Club or Prosper. As soon as the owner’s application gets approved by the company, the lenders would then determine if the company is right for their investment or not.
How to choose the right investor?
Now that you know a bit about the type of investors that you might encounter, it is vital to choose correctly, so that both parties do not reach a disagreement or have any issues later on. You wouldn’t want to connect with a person who ends up being wrong for your business, as well as your life. To be on the safe side, here are some things that you should keep in mind:
Understand the various funding choices
Selecting the right investor is a lot more difficult than just trying to obtain the capital you need for your business. This also requires a certain level of commitment from your side. You would need to make a list of what your expectations are before you can approach any particular type of investors you feel is right to fund your business.
Looking for potential investors is not just about what you are getting. You also need to ensure that the person is not engaged in fraudulent activities or someone you might regret taking capital from later on. It is better to learn all about their dealings or the services that they provide to you.
Most importantly, you need to understand what they expect and how involved these type of investors would want to be in the company operations. Are you ready to meet their expectations? Ensure that you keep options open for you and find all the details before you make a deal with the wrong person.
Know where to look
Even though finding the right type of investors can be daunting, all you need to do is search for them in the right place. You can search online and take advantage of many investor databases like the Angel Capital Association, AngelList, or the Angels Den in the beginning.
Another thing that works wonderfully these days is self-promotion. You can participate in community business activities, network, and even write blog posts about yourself and the company. These things can help you have potential investors come to you instead of you going to them.
Make an investor’s shortlist
For enhancing your chances of obtaining funds, it is good to narrow down your list of potential investors to the ones that you feel are more appropriate for you. You can keep the criteria for the list of things like the investor’s reputation, previous partnerships, and mutual connections.
Ensure that you have a list of about 30 to 50 investors that you can put on the spreadsheet along with any other vital and relevant information for easy reference.
Look at your networks
It doesn’t matter which type of investors you choose, each one of them are looking for ways to reduce their risks while lending cash to startups. And this means that they would have more interest in you if they know you or if you have been highly recommended.
Hence, it is better to use your networks to gather all the potential connections with the investors available, and then you can consider the right investor for you and your company. When you have decided this, you can ask the person who knows the both of you to make an introduction.
Perfect your pitch
As soon as you have the attention of an investor, the next thing you need to do is have a perfect pitch to interest them into approving your proposal. If you spend your time and knowledge to prepare, it pays off. Add all the points that would give a proper idea and assurity of how the audience would be approached, and how the sales would increase.
Another thing that you need to focus on is to make sure that the starting of the pitch should be so interesting that the entire discussion has the investor’s attention. Also, the business plan has to be clear and outline the investor’s profit in the plan.
Ultimately those who take their time to find the right type of investors for their business, who are both tailored to their particular operational and financial needs, would be able to build the right support required for a long and successful partnership.
Which types of Investors to avoid?
Not all the investors are the same. Hence, it is crucial to examine potential investors with the same due diligence that the investors take in considering the startup options that they would like to fund. As mentioned above, it is vital to investigate all about the type of investors you are to choose and the specific investor you have in mind.
Study their management style, values, and even their track records. You need to be aware of who you are about to get into a long relationship with, since a few investors do take advantage of new entrepreneurs. Avoid those investors who are common litigators since they might threaten to gain more control after investing, if they learn that you do not have enough money to fight them in court.
Avoid those type of investors who want a lengthy contract with vague clauses that can be used in their favor. Also be aware of those who might try to take over all the strategic decisions of the company. Even though some level of mentorship is good, complete oversight is not.
You might also come across those type of investors that might not have any sense of business or do not have any capital to invest in your business. These people just try to get something out of what you have and run away. This is also the reason why due diligence is very important.
How do I get introduced to investors and where to look?
People often say it’s not what you know, but who you know, and the same is true for obtaining the right type of investors. As a matter of fact, many investors do not just listen to new entrepreneurs entering the market and approve the deal. These investors tend to listen to other investors or the news about a new product that might get high market value.
To explain this better, here are some steps that would help you obtain investors to come and knock at your door:
Begin to look within your own network and figure out who you know and if that person knows someone, so you can look for more within in their network. You would be able to find connections on LinkedIn online and the other social networking sites. This would help you get more type of investors and get introduced to them as well.
Attend pitch competitions, conferences, and meetups where you know potential investors and what your network would be. You can then find many more types of investors in the market. You can study their body language, the way of talking and how they interact with other like minded entrepreneurs.
In the end, you might not find the right VC for you, as some may not attend meetings for these new types of investments. However, an introduction by another investor would help you build connections and your network.
Request a colleague or friend to have you introduced to some specific type of investors that you have had an eye on for some time and researched about. You can also ask for their email address and send them a concise email with all the details.
And since your friend might have already sold the idea of funding your startup, you need to explain mostly about the marketing part and the investor’s profit. Also, do not ask your friend to introduce you to a long list of people. Instead choose two or three right ones to get introduced to.
Request for connections or introductions from a fellow entrepreneur. If you are not considered as an entrepreneur at the moment in the circle, make friends and ask them to help you connect with the right type of investors.
Ensure that they are entrepreneurs who have been in the industry for some time. Since they started with the same spirit, they would be able to give you some good contacts. Just make sure the entrepreneur is inline with your business objectives and goals.
Request early investors to introduce you to the other type of investors if you have already got the initial funding. And since an investor often listens to another investor, you can get more potential investors in your list. Another thing is that since the first investor already has an idea about what your company is about, his experience would be able to convince the next investor.
Make a database of the type of investors that you would want to be introduced to, along with those who can introduce you to them. As soon as you begin to learn more about them and also are introduced, you can add specific details here and there so that you do not get confused on who to choose.
Tell the person who introduced you to an investor about how it went, since they would want to know if their reference paid off or not. This would help you build long term relationships with these people and both can help each other later from the trust that you build.
With this list of things to look for with investors, remember not to ask other people to identify the right type of investors and do all the work for you. You need to do your own research, and take help of getting connections and being introduced by others. This is one of the biggest steps in the funding industry and can help you for a long-term.
Now that you are aware of all the types of investors that you can get and how to find them for your startup, it is now important to learn about the types of funding and how to prepare yourself for each step. The next article would help you understand the types of funding options that you have and which ones that would be right for your company and at which stage.