Funding a startup can be challenging. However, if you’ve already done your research, you probably know about funding stages of a startup and the different ways of funding a business, such as business loans, personal funding, and investors. In addition, several types of investors can help you immensely, not just with financial means but also with managerial and technical expertise.
However, most business investors tend to have different criteria before investing in a business. Also, their conditions are situational, which means that they should only be approached when you’re in a specific situation.
For example, suppose you’re a computer technology startup. In that case, the best investor you should go to is venture capitalists because most of them are looking to fund businesses that are about computer technology. We will discuss the types of investors you should know about when funding a startup to help you make the right decision.
Angel Investors
Those who need money for their startup often consider borrowing from lenders to fund it. Availing easy loans to payoff business necessities can be helpful, especially if you aren’t aware of other ways to get funding. But while conventional or business loans are good options because of their repayment terms, some investors are willing to get you money for a small exchange.
Commonly known as seed investors or angel funders, Angel investors are high-net-worth individuals seeking to fund small startups to help them go off the ground. Sometimes, they also fund entrepreneurs themselves to help them start their projects. But, of course, the catch here is that they are given a percentage of equity for their financial funding.
Most of the time, high-net-worth individuals become angel investors when they have excess money. They then use their excess money to fund small startups. But why not use a significant amount of their money to invest in a startup? Startups tend to be risky. So, they only use their excess money. This type of investment usually represents 10% of their portfolios.
Compared to lenders, angel investors have more favorable terms. This is because lenders look at the borrower’s ability to pay back the loan or, more specifically, their creditworthiness. On the other hand, angel investors are more invested in the entrepreneurs themselves and how they can develop their ideas and progress their businesses.
Venture Capitalists
A venture capitalist (VC) is a private equity investor that provides startups with high growth potential in exchange for their equity. Private equity investors form limited partnerships that pool money and find startups with high growth potential. Once they find a startup that meets their requirements, they will deploy a venture capitalist and fund their firms in exchange for equity.
A VC doesn’t fund startups from the onset. They look for startups that have been planning to commercialize their ideas. The VC will help nurture the startup’s growth and look to cash out a return on investment. Another requirement is startups with a strong management team, a unique product or service, a large potential market, and a solid competitive advantage.
VCs also tend to look for opportunities in industries they are most familiar with. This is because they are looking to own a large percentage of equity of a big company for a chance to influence its progression.
What are VCs made of? Typically, they are made up of wealthy investors, pension funds, large financial organizations like banks, or a mixture of these examples. All partners control the funding, but the VCs’ decision is primarily up to the firm.
Business Incubators
Business incubators are programs that are specifically designed to help startups innovate and grow even further beyond. They usually provide resources like workspaces, education on how to run their businesses, and access to investors to fund their projects.
With these resources, startups can make their ideas take shape while operating on a relatively low budget. But before you can join business incubator programs, you must know and meet their requirements first.
There are several types of business incubators like non-profit development corporations, venture capital firms, etc. But what is the difference between business incubators and accelerators? Business incubators tend to follow a less rigid schedule and tailor a schedule that properly fits the startup’s needs.
You can think of these programs as residencies but with the bonus of having mentorship and educational programming. And, of course, the incubation process depends on what kind of business that startup is.
The best thing about business incubators is that they will introduce you to investors who are looking for a business like yours. This means that you have a better chance of landing a deal with investors at the end of the day.
Final Words
Funding a business can be challenging, but fortunately, some investors are willing to give you and your business a shot in financial funding and business expertise. Although they can be hard to look for and have a lot of requirements, having the financial backing of an investor is worth it.
