What Types of Investors Look for Startups?

Starting a new business can be exciting, but you may need some funding. You could always apply for a business loan, win equity-free cash prizes at pitch competitions, apply for government equity-free grants, or bootstrap your company and keep all your equity.

However, what if you want to scale quickly and leverage investments to capture that elusive market share with your idea? Fortunately, there are many investment options available for startups to pursue.

There’s more than one type of investor to fundraise from. What are your choices? Here’s a quick guide to understanding the types of investors for founders pursuing venture capital. 

What is an angel investor?

An angel investor provides financial backing for early-stage startups, typically in exchange for equity in the company. Angel investors are generally high-net-worth individuals who often are accredited investors with experience in the industry or sector in which the startup operates. 

Angel investors play an essential role in the startup ecosystem, as they help to provide critical funding and support to help startups get off the ground and grow. Angels often invest in too early-stage startups for venture capital firms or other institutional investors. They may provide financial support, mentorship, advice, and access to their network. 

Sometimes, angels work together in an angel investment syndicate, a collection of angel investors who may pool their money to provide even better opportunities for promising startups. When pitching your idea, look for angels interested in investing in companies like yours.

What is a venture capitalist?

A venture capitalist (VC) is a private equity investor that provides capital to companies with high-growth potential in exchange for an equity stake. Startups often turn to VCs for funding to scale and commercialize their products. 

Contrary to common belief, VCs typically fund a startup in its early stages. VCs seek to target firms bringing in revenue and looking for more money to commercialize their ideas. The VC fund will buy a stake in these firms, nurture their growth, and look to cash out with a substantial return on investment (ROI).

Due to the uncertainties of investing in unproven companies, venture capitalists tend to experience high failure rates. However, the rewards are substantial for those investments that do pan out. Search for VCs with industry and sector interests that align closely with what your startup does for the best possible match and outcome.

What is a family office?

A family office is a private wealth management firm established by an ultra-high-net-worth family that provides that family with a selection of personalized services that include investment management, financial planning, estate and tax planning, philanthropic investing, concierge services, and more.

While some might associate family office investing with more conservative wealth management strategies, family offices offer investment opportunities across a vast spectrum. Startups in tech and other industries are among the fastest-growing investment areas for family offices. 

According to research by Camden Wealth, 64% of family offices currently invest in biotech, 61% in fintech, and 49% in artificial intelligence. The key (as it is with all types of investors) is to find a good match between your interests and what the family office is interested in investing in. 

What is a corporate or institutional investor?

Institutional investors are organizations that invest other people’s money. Institutional investors raise capital from many sources to purchase significant assets, usually big blocks of stocks. Examples of institutional investors are mutual funds, exchange-traded funds, hedge funds, and pension funds. 

More corporations are investing in promising startups. For example, industrial robotics company Plus One Robotics recently closed a $50 million Series C funding round from corporate investors like BMW i Ventures. The investment makes sense for auto manufacturer BMW given their use of industrial robots in car manufacturing and that Plus One offers AI-enabled robotics capabilities for industrial robots.  

Because institutional investment firms are primarily profit-driven above all else, corporate investors search for startups based on rigid financial criteria or other qualifying factors.

What is peer-to-peer lending?

P2P lending, or peer-to-peer lending, involves loans from other individuals, cutting out the traditional middleman, such as a bank. Examples of P2P lending include crowdsourcing platforms like Kickstarter or Indiegogo, where businesses seek to raise capital from many investors online in exchange for products or other benefits. 

If your startup is in the early stages of developing a product and needs funding to bring it to market, peer-to-peer lending platforms can be a viable option. Kickstarter and similar platforms allow you to showcase your product idea and attract funding from a community of backers who believe in your vision.

Peer-to-peer lending platforms can also be helpful for testing market demand for your product or idea. By creating a crowdfunding campaign on platforms like Kickstarter, you can gauge interest and validate your product concept before investing further resources into development.

Conclusion

As a founder, it’s essential to thoroughly research and understand the different types of investors and their investment criteria to find the best match for your startup. Consider factors such as industry alignment, funding stage, mentorship opportunities, and strategic partnerships. 

By choosing the right type of investor, you can secure the funding and support needed to fuel the growth and success of your startup. Remember to tailor your pitch to each investor type and showcase how your startup aligns with its investment strategy for a higher chance of success.

If you need help getting your startup up and running and would benefit from world-class mentors and startup programs designed to fit into your busy life, contact us at Geekdom to learn how we can accelerate your path to funding success!

The featured image is of founders learning about the different types of investors interested in startups at Geekdom. Photo courtesy of Geekdom.