04 Nov The Different Types of Investors
Starting and growing a business often requires some type of financial investment. There are many ways to raise money for your start-up, but choosing the right method for your business can be challenging.
If you decide that you need to look for external investors for your business, you should know all the different types of investors. In this article I will discuss them all, so that you are able to make the right choice based on your situation and needs.
In most cases, people and businesses are not willing to give you money for free. They always expect something in return. We usually separate investors in two categories: those that want equity in your business and those who will lend you money, but expect you to pay it back.
Some investors will invest in your business in return for equity. This typically means that they want shares in your business. Based on your business plan and market analysis, these investors are willing to invest because they believe that the value of your business, and the value of their shares, will experience significant growth over time, making them a profit in the long run.
Other investors are willing to lend you money, but expect you to pay it back, typically with interest. To be approved by these investors, you typically have to prove that your business plan is viable, and that you will be able to pay the loan back. This group includes banks, receiving personal loans from friends or family, and others.
For the purpose of this article, we will only discuss equity investors, rather than lenders.
Angel investors are individuals looking to invest in your business. These are typically people of significant wealth. Some angels only invest in one or two businesses, other invest in many. Business angels can have various reasons for investing, and might be looking for different deals and arrangements, but it’s typical to give them equity in return for the investment.
One of the benefits of working with an angel investor is that you can choose which investor you want to work with. You can therefore seek out someone who is able to grant you access to a network of connections, someone who can help your business get on its feet, or someone who has experience in your industry.
You can also specifically seek out angels who want a more active or a more passive role in the business, depending on your preferences.
Angel networks are usually a great place to start looking for angel investors, as they are well suited to pair you up with a suitable match.
Angel investor groups are simply a network of several angel investors who have teamed up to make money together. This allows them to have a larger stream of money, lower risk in case an investment doesn’t work out, and more power and knowledge to be able to really help the startups they invest in.
Angel groups are typically prominent in a local area, and often have a strong network of people that could help your business substantially.
Crowdfunding has grown popular in recent years. This is when a project or business is funded by a large group of investors, all of which fund a small amount of capital each. Crowdfunding typically happens all online, and there are several websites where you can register.
The crowdfunding process is much simpler than using many other investment methods, because you don’t necessarily have to show your business plans to professionals. Instead, you have to showcase your idea to potential buyers, who can crowdfund the idea if they like it.
On most crowdfunding websites you have to set a funding target, and you will only receive the money if you reach your goal. The investors typically also want something in return. It’s common to treat their investment as a sort of pre-order. If they invest an amount equal to the price of the product, they will receive the product when it’s manufactured. This is a great way to not only get the initial investment that you need to start production, but also to prove that potential buyers are interested in the product or service.
An accelerator is a short term programme, typically lasting less than a year, where you get access to mentoring, networking and education in addition to an investment. Unlike other forms of investment, accelerators really focus on helping your business grow rapidly. This could be a great option if you have a fantastic business idea, but are lacking business knowledge and industry expertise.
Syndicates allow groups of up to 99 investors to invest in startups together in one joint investment through SPVs.This means that you will receive one large check rather than many small ones, and there’s less legal work to complete.
This also means that rather than spreading the equity of your business between many smaller investors, the syndicate becomes one investor with a larger share.
Venture capitalists are companies that specialize in investing in a wide range of businesses in order to make money. As they are companies, they tend to have a lot more money compared to individual investors, and can therefore be a good alternative if you’re looking for large investments in the 6-7 figure range.
As venture capitalists are set up as a company, often with employees and overheads, they might be able to invest a significant amount of money into your business, but only if they are pretty certain that they will make a profit. In return for the investment, they will get equity in your company, allowing them to profit on your business growth.
Alan Davidson is a Chartered Accountant, director and founder of Pentins Business Advisers, entrepreneur and author of the Amazon best-seller “Achieve Your Business Vision”. With over 25 years of helping businesses succeed, Alan knows how to build a business with real value, while avoiding costly mistakes.