Investors can partner with a startup at almost any stage in its life; they are unique partners in the growth process of a startup. The level and quality of their involvement can play a part in a company’s success or failure. It is critical for budding entrepreneurs to take the time to learn about the type of investors that are available and how to use best practices when approaching them for funding.
Below are six of the most common types of investors, as well as recommendations for when they should be considered.
Six Type of Investors
Friends and Family
Business owners can rely on family, friends or close acquaintances to invest in their companies, especially in the beginning. However, make sure you speak with your legal team as there are legal limitations to how many of these individuals can invest in startups. While it may be easy to convince loved ones to help, thorough documentation is highly recommended.
Banks are a classic source for business loans. Before your loan application is approved, you will usually be required to review your revenue stream or produce proof of collateral. Because of this, banks are often a better option for more established businesses. The downside to this is that majority of you reading this are in the cannabis industry, and many are still having trouble finding a bank to work with for your day to day needs, so to get a bank loan for a cannabis business doesn’t seem feasible at this time.
Peer to peer (P2P) lending is a way to borrow without using a traditional bank or credit union. P2P lenders are individuals or groups that offer capital to small business owners. P2P loans aren’t always better than loans from a bank or credit union, but they have some unique features that make them competitive, such as low costs, quick and easy, credit matters but blemishes are okay.
Crowdfunding has become a popular choice for startups when it comes to raising capital. In 2013, through crowdfunding campaigns, customers supported their favorite companies and contributed an estimated $5.1B in total — up from $3.2B in 2012.
Crowdfunding campaigns rely on contributions and support from your personal and professional network, and I cannot stress enough how crucial it is for entrepreneurs to encourage not just contributions, but also to encourage your customers, fans, and followers to share it widely!
An angel investor is an affluent individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity. These individuals have an earned income that exceeds $200,000 or who have a net worth of more than $1 million.
Angels investors typically invest their own funds, unlike venture capitalists who manage the pooled money of others in a professionally managed fund. They are useful for entrepreneurs who are beyond the seed stages of financing but are not yet ready to seek out venture capital.
A venture capitalist invests funds into startups on behalf of the fund investors. Usually, Venture capitalists are used only after a business begins to show a significant amount of growth, i.e., growth in the number of employees, increase in annual revenue or both. These investors usually invest a substantial amount of money. They gain most of their returns through a percentage received as compensation from the profits of a hedge fund or private equity or from “carried interest”.
Finding the right investor
Entrepreneurs looking for investors often feel they can’t be picky, especially in the early stages. If they need money, many believe they have no business turning away anyone who has it. However, this is the wrong approach; investors need entrepreneurs as much as entrepreneurs need investors.
If you choose an investor who doesn’t have your interests at heart or who is out of sync with what you’re trying to build, it can lead you down a path of regret, and you may end being in a lousy relationship every day for several years.
Understand Your Needs
If you need help navigating the business world, you may want an investor who has a more hands-on approach. Someone who can teach you how to maneuver through the landscape of building a startup and provide you with guidance and insight. On the other hand, you may want a silent investor, someone who won’t interfere in the day-to-day operations of your business.
You will need to make sure that you layout your requirements and the critical qualities you are looking for. This way you have an understanding of what you wish to get out of the relationship. Make sure to ask questions about their expected role and make sure to communicate openly about your needs.
Research Your Options
I have presented six different type of investors. However, there are numerous investment options out there, so take a look at the list you made of your own needs. The answer to your questions will help you to decide which route to take.
When you are starting your relationship with a potential investor, make sure to have a conversation about the industry. You will need to make sure that they understand the potential pitfalls and challenges to the industry, so they aren’t surprised when you hit a snag. If they don’t understand your market, they won’t be able to follow your plans, or may not be able to help you maneuver through the challenges effectively.
Know Where To Look
When I was first started to look at raising capital for DCN, I ended up wasting so much time and resources, I was cold-emailing investors, not looking at their portfolio or utilizing my personal network. Cold emails rarely work, however occasionally I will still send that cold-email out. The biggest mistake I made, however, was not looking at their portfolio and doing my due diligence.
As an entrepreneur, when you don’t take the time to look at what these investors or firms are investing in, you are not only wasting your time but also their time in an email that should have never been sent out in the first place. As I began doing more research, speaking with more investors and founders, I started tightening up my approach.
- Utilize investor databases such as Angelist, Crunchbase, and Angels Den
- Look for pitch events to pitch at
- Build a list of investors or VC’s who invest in your industry or business model.
- Utilize your network, look at your list of investors and see if you have any connections in your network so you can get a warm introduction.
- Attend investor and startup networking events, check out StartupGrind, 500 Startups, or even DCN’s very own event, The Seed Series
Perfect Your Pitch
Make sure your pitch is catered to their needs and desires, and show how your startup is the best option for them to invest their money in right now. You need to make sure you have done your research about your market, your potential, and your financials. Be sure that your pitch will explain to them how you’re going to meet their investing goals.
Once you decide on the type of investor you want, try to get as many interviews lined up as possible and don’t just go for the first one that makes you an offer. You want to nurture this relationship, as this relationship is going to have a significant impact on the future of your company. If the fit just isn’t right for you, keep looking. You don’t want to wind up in a situation where your vision is lost because of investor incompatibility.
Ultimately, entrepreneurs who take the time to find investors tailored to their specific financial and operational needs will build the foundation needed for a successful partnership.
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