The 12 Types of Startup Investors.
Many entrepreneurs at some point in building their ventures will consider raising external capital. Some of them will decide to bootstrap…
Many entrepreneurs at some point in building their ventures will consider raising external capital. Some of them will decide to bootstrap, and some of them will never need to fundraise to achieve the desired value of their venture, but those that decide to take on external capital will need to evaluate available options.
Angel investors and VCs are some of the most popular target investors, but they might be out of reach or just not suitable for every business, especially startups that are in the pre-product market fit and pre-revenue phase. Here is a breakdown of the available options depending on the startup growth profile.
PRE-SEED — Idea Stage — Financing< US$ 500k
1. Family & Friends
This is typically the first external capital for a startup. The startup is usually in the idea stage and is too early for institutional investors. This is “startup” capital, normally ranging from US$ 5k-100k, that is meant to fund a company so it is ready for the next, angel or institutional round.
2. Angel Investors
Angel investors are usually wealthy individuals that are aligned with the vision of the company and give support to start-ups at the initial moments when most investors are not prepared to back them. The average check size of an angel can widely vary between US$ 5k-200k. Angels make investments usually in exchange for convertible debt or ownership equity — anywhere from 1%-10%. Having an industry expert angel investor at this stage of a company can be strategic for attracting follow-on capital.
3. Angel Syndicates
While angel investors are generally more focused, closer to the founders, and in best cases very actively supporting companies in the early stages, angel syndicates, a pool of angel investors, can offer more diversified support and more capital. Angel groups can make investments in the mid-range, between most individual angels and VCs, typically in a range of US$ 100-500k.
Examples: Angel Investment Network, Cambridge Angels, Firestartr, Green Angel Syndicate, Minerva Business Angel Network.
4. Accelerators / Incubators
Accelerators are popular 3–6 month long programs that provide the mentorship and capital necessary to accelerate the growth and success of young startups. Typically, the program will provide some capital, somewhere between US$ 20-100k, and in exchange will take an equity stake in the startup, typically up to 15%. Being part of a well-known accelerator program can radically improve access to the follow-on capital, talent and partnerships.
Examples: Y Combinator, TechStars, 500 Startups, Venture Catalysts, StartupBootCamp, Metavallon.
Check out the site Your First Investor to look at the different types of programs available around the globe, and browse through websites like AngelList and f6s to look for accelerators/incubators.
5. Crowdfunding (peer-to-peer, equity, rewards)
Crowdfunding enables startup founders to raise capital from a large number of people via online platforms. It can be a great way of building a community around your business offering and testing a market early. Many platforms operate an all-or-nothing funding model. This means that if you reach your target you get the money and if you don’t, everybody gets their money back — no hard feelings and no financial loss. Crowdfunding does not fit every business profile but can be a good option for B2C consumer product startups that want to test the market early. Average Crowdfunding Campaign size: US$ 5–50k.
Examples: IndieGoGo, Kickstarter, Crowd Supply, Fundable, SeedInvest.
6. Family Offices
While 80% of family offices put their money in venture funds, there are a growing number of family offices that make direct investments in startups. While getting an investment from a family office at the early stage can increase the pool of capital available, it is challenging to get access to them, as understandably, their operations are kept confidential. Also, family offices seldom lead investment rounds, which again puts them in an alternative investor category. The size of checks can start at anywhere between US$ 500k-millions. Some of the better-known family offices include Lauder Family Office, Smegvig Capital, Pritzker Group, Armada Investment Group, Kirsh Office, Larry Page Family Office, and Michael Dell Family Office.
SEED ROUND — Pre-product / Pre-revenue — Financing US$ 500k < US$ 5m)
7. Corporate Venture Capital
Corporate Venture Capital is a way for large businesses to obtain a competitive advantage and access to new ideas, markets, and technologies by acquiring a minority stake in innovative startups that align with their strategic and financial objectives. Taking on a prominent corporate venture capital firm can bolster your startup’s credibility, bring operational capacity, attract more capital, clients and give access to new synergistic opportunities. However, it is crucial that the values, culture, objectives, and agendas of a corporate venture capital firm align with the ones of your startup — as the management of a CVC partnership can turn out to be challenging.
Examples: Bain Capital Ventures, Google Ventures, Salesforce Ventures, Intel Capital, Baidu Ventures, Alexandria Venture Investments.
8. Venture Capital
Founders normally reach out to VC firms when they are ready to raise an institutional round, which means that their startup can demonstrate accelerating traction or their business requires significant funding to get off the ground. Taking on institutional money is best when a company already has a product-market fit and is looking to rapidly scale. Venture capitalists invest at the low US$ 25,000 to millions, depending on the stage. The equity stake can vary, depending on the valuation, from 15–25% (Series A-B), 5–15% (Series C-Exit).
Examples: A16Z, Benchmark Capital, Ribbit Capital, Accell, Index Ventures, Bessmer Venture Partners, Greycroft.
A ROUND ONWARDS — Acceleration of Growth Stage — Financing > US$ 5m
This is a typical stage of investment for Venture Capital firms. However, besides venture financing, startups can raise capital from the following:
9. Private Equity
Private equity firms mostly buy mature companies. However, late-stage venture capital deals now more closely resemble the traditional stomping grounds of PE growth investors. The growth rounds of US$ 100m+ have demanded ever-larger checks from investors, requiring backers with deeper pockets. And those late-stage rounds have become sizable enough for PE firms, whose assets under management tend to be much larger than those of venture capital firms. Late-stage deals come also with significantly lower risk for private equity investors, who have historically invested in more mature companies, which means that the deals’ characteristics are similar to existing PE deals. Typical round size: US$ 80m+.
Some of the most active growth-focused PE firms include Insight Partners, General Atlantic, and OrbiMed.
10. Public
When a startup decides to raise funds from the public including institutional investors as well as individuals, by selling its shares, it is known as an IPO. An IPO is commonly referred to as ‘going public’, as the general public now can directly invest in your company by buying its shares. Going public is a complex process-the transition from a private to a public company is an important time for private investors to fully realize gains from their investment, but it also provides the company with access to a huge pool of funding. Private companies with strong fundamentals and proven profitability potential can qualify for an IPO, however, it is accepted that an IPO-ready company is typically near unicorn status (US$ 1bn valuation).
11. SPACS
SPACs are a way for companies to become publicly traded in a way that is often less complicated and cheaper than initial public offerings. SPACs generally have two years to search for a private company to merge with or acquire. There were about 150 SPACs in 2020 in the US that cumulatively raised about US$ 64 billion — nearly as much as all IPOs in the US during the same time. SPACs are particularly popular in the US — Virgin Galactic, DraftKings, and Nikola Motor have all entered public markets by merging with SPACs.
12. Banks & Debt Financing
Last but not least, banks can also play an important role in financing startups at various company stages. Bank loans are best suited for startups with reasonable cash flow, as banks give preference to businesses that can gauge profitability and credit history. The advantage of raising debt is not giving up control/equity in a company. However, raising debt can be challenging for most startups and provide limited capital. More financial historical data and better financial standing offer more options and faster access to debt capital. There are several dedicated banks in the market offering debt financing for growth startups. These include Deutsche Handelsbank, European Investment Bank, NIBC, and Silicon Valley Bank.
In the past few years, there has been a new model of debt financing adopted by companies that provide revenue-based financing that enables founders to raise growth capital without interest or equity. These companies target SaaS and subscription-based business model startups with consistent recurring revenue streams that support low-risk repayment of loans. Examples: Pipe, Uncapped.
I have only touched upon these 12 types of fundraising options, but I hope that you have found this outline helpful.
As your startup grows different sources of capital will be more advantageous and valuable to fueling that next level of growth than others. Understanding these differences might turn out to be invaluable to getting your startup off the ground, efficiently fundraising, or forming a successful partnership with your target investor.
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by Agata Nowicka — a serial entrepreneur and investor based in London, UK.
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