Growing a company from the scratch requires making tough decisions that are valuable for the startup in the long run. One such decision is choosing appropriate investors for your startup. A wrong investor at the early stage of the business is most likely to have adverse effects on the growth of the business. As a founder, it’s important to leverage solid relationships and networks when selecting an early-stage investor in your company.
How will you know how to select the right investor? The first step is being able to identify the types of investors that can help your startup grow. These are the most common investor categories that you should be aware of
Your friends, family and acquaintances are often the first points of call when sourcing funding for your startup. These are the closest people you have a relationship with and would be interested in investing in you and your idea. They almost always have an understanding of the kind of person you and they trust you. Although the typical amount of investment from friends and family might be a limited sum, sometimes it can go as high as an external party depending on the person you approach. External investors are also sometimes interested in knowing if you have been able to raise from your friends and family because it also gives them a huge sense of what your personality is before they also proceed to invest in you.
Startup incubators are often designed to help founders/entrepreneurs to build their companies by refining their business ideas. They often require the startup team to colocate in a specific place or region for some time while working on the business idea. The goal of an incubator is often to provide resources & prioritize networking and it often ends with a pitch/demo day event where the teams present their ideas to investors and compete to win a grand prize, usually funding.
Startup accelerators on the other hand are often designed to provide early-stage and growing startups with resources, mentorship and funding that can help accelerate their growth within a stipulated period. They are often intense and fast-paced making it easier for startups to grow. The startups that apply for accelerator programs have usually gotten some form of impact already and have tended fast growth. Founders are usually given a seed investment to help boost their growth within a period in exchange for equity in the business and the startups are often required to share the growth achieved at the end of the program. The most common accelerators across the world are Y Combinator and Techstars amongst others. These two accelerators often have a tough selection process and a limited acceptance rate.
Angel Investors are usually high-net-worth individuals who invest their own money into a startup. They are high-risk takers interested in making an impact or a profit. In addition, they are often willing to invest at an earlier stage in the company and also often invest in areas/industries that are peculiar to them or ideas that they strongly believe will make a huge impact.
In comparison with venture capital, angel investors typically invest a smaller amount of funds, especially at the seed stage of investment. It’s often always challenging to find angel investors as well because they most often do not have an application process. Finding an angel investor often requires in-depth networking and research. Your first point of call might be to check angel networks in your locality or speak to other founders who have been able to raise angel investments.
Venture Capital firms are investment firms that provide capital from a pool of investors to early-stage and growing businesses that possess long-term growth potential and scalability. Venture capital generally comes from well-off investors, investment banks, and any other financial institutions.
Venture Capital firms do not just focus on monetary form but also in the areas of providing technical and managerial expertise for the company to help accelerate its growth. Venture Capital is a great option to fundraise especially when you’ve been unsuccessful in raising money through bank loans and other debt instruments. For startups, Venture Capital is often where you receive the biggest check and helps with boosting credibility and visibility for your company due to the power and reputation that these firms usually have.
Before going ahead to select your preferred kind of investor, it’s often great that you put in a great deal of research to understand the interest and expertise of the investor type, how their investment will affect your dilution and how it will help you move to the next stage of growth and how the investor/firm treats/have treated entrepreneurs currently with them or in the past.