The right investors can help your startup scale. And for those still in the ideation stages, an investor can mean the difference between your idea leaving the ground or never leaving your head.
There are various types of investors to consider, each with their own unique benefits and drawbacks. Understanding the different types of investors can help you determine which funding option is best suited for your startup’s needs. Understanding each investor type’s interests and investment criteria, you can better align your startup’s vision and goals with the expectations of potential investors.
Incubator
If you have a new business idea but have yet to get it completely off the ground, an incubator could be just the thing.
An incubator is a program, either private or non-profit, targeting startup owners with big ideas and little to no funding. Incubators will help you gain access to the information and resources necessary to get your business idea off the ground and find the seed funding you need. But not all incubators provide actual funding – they’ll simply point you in the right direction or match you with potential partners.
Where to find: There are numerous incubators available online – Y Combinator is one of the most popular options. Research your local area to see if there are any nearby incubator programs. If you can’t find any local options, focus on online platforms and see if your business fits their criteria.
Accelerator Programs
An accelerator program is like an incubator in that they provide a wide variety of resources. Unlike incubators, accelerators are concerned with existing companies, not those with only an idea.
Accelerator programs can be private, sponsored by investment firms, or even attached to companies or colleges. While accelerators can vary, most offer funding to help businesses grow. Along with money, they might offer training, access to experts, and additional resources to keep business owners on the track to success.
Where to find: Accelerator programs are available locally and online via platforms like Gust. Again, see if you can find a local group first. These can be less competitive and come with the advantage of more personalized help. If nothing comes up, check online and find a program that looks like the right fit for you and your business.
Bootstrapping
Bootstrapping is the process of self-financing your own business. While you likely won’t be able to finance your business entirely on your own without a substantial financial safety net, it’s often the best place to start – even, and especially, if you plan to see additional investment down the line.
Potential investors want to see that a small business owner has skin in the game. They want to see that you’ve believed in your business enough to invest your own money into it. Why should someone else believe in you with their money if you haven’t first shown belief in the idea yourself?
Realistically assess your personal financial situation and see if there is any way – even a small way – that you can invest in your own idea. The extent to which you’re invested in your idea, relative to your financial situation, will be taken into consideration by outside investors. If you spend 10% of your worth on it, then you will be in a better position to ask them for 10% of their investment ability.
Crowdfunding
Crowdfunding is a type of funding in which people “invest” in your company in exchange for a deliverable. Instead of interest or ownership, crowdfunding generally involves delivering an early access version of your product or service in exchange for funding. You create a profile on a platform, setting goals, and asking for donations from the public. This method allows startups to reach a wide audience and raise funds from multiple sources.
Crowdfunding is an especially effective way to fund products that are past ideation and during prototyping phase. This means both new and established businesses can be a good fit for crowdfunding. Keep in mind that if you fail to deliver the promised rewards after a crowdfunding campaign, your business and its reputation can both take a serious hit.
To create a successful crowdfunding campaign, it’s crucial to have a compelling story and clear goals. By effectively communicating the value of your product or service and its benefits to potential backers, you can increase the chances of reaching your funding target, raising funds and securing the capital needed to bring your idea to life.
Some well-known crowdfunding platforms include Kickstarter, Indiegogo, and GoFundMe.
Friends and Family
Friends and family can provide informal or structured funding for your startup. While this option may seem convenient and accessible, it’s important to approach these relationships with care, as mishandling can lead to damaged relationships. When seeking funding from friends and family, it’s crucial to be transparent about the risks involved and establish clear expectations and terms of the investment.
One way to mitigate potential disputes is through structured loans. These loans involve completing paperwork and may include a predetermined timeline for repayment, providing legal security in the event of a disagreement between the lender and the borrower. By handling these investments professionally, you can maintain healthy personal relationships while securing the funds necessary for your startup’s growth.
To request funding from friends and family, you can reach out to them with a phone call, text, or email and invite them over for a presentation. You know your family better than anyone, so tailor your methods to fit their personalities. If they’re informal and relaxed, a simple get-together over drinks or dinner could be just the ticket.
Equity Financing
If your company’s still a startup but past the ideation stage, equity financing is a popular route to funding. Equity financing is the practice of receiving funding from outside parties in exchange for shares of your company. This approach can help you raise money quickly, which can be especially useful if there’s a large-cost hurdle you’re struggling to get over — for example, a new product you’re trying to develop, an expansion, or even a costly campaign.
Where to find: Equity financing is available from many sources, including friends and family. You can also search for equity financing groups online. There are equity financing investment firms and equity crowdfunding sites that will help put your business in front of potential investors to get the money you need.
Angel investors
Angel investors are experienced businesspeople who invest capital and expertise in exchange for equity in early-stage startups. They can provide significant advantages, such as mentorship, advice, access to beneficial networks and connections, and industry knowledge and expertise. By partnering with an angel investor, your startup can gain valuable support and guidance that can propel your venture’s growth.
The Angel Capital Association is an angel investment network of accredited investors that fund promising businesses. Platforms like AngelList can help connect startups with angel investors who are interested in investing in their industry or field. By leveraging these associations and platforms, startups can gain access to a network of experienced investors who can provide not only capital but also valuable insights and connections in the industry.
When seeking funding from angel investors, it’s essential to keep in mind that they typically seek a 15-25% equity stake in the startup. As you negotiate with potential angel investors, be prepared to discuss the terms of equity financing, their investment and the value they bring to your venture.
Venture Capitalists and Firms
Venture Capitalists (VCs) are private investors who use their own money to fund businesses. Because venture capitalists are individuals who often aren’t affiliated with a group, they can impose a variety of requirements that come with the funding. Some VCs will require equity or a board role, while others may only be interested in collecting interest or another form of payout.
Venture capital firms are specialized investors that focus on high-growth startups, investing in exchange for equity ownership with the goal of helping startups reach their full potential. These firms raise capital from limited partners to invest in startups or venture funds with the potential for considerable and accelerated growth.
Venture capital can provide startups with access to capital, expertise, and networks that can assist them in expanding and achieving success. VCs can also offer direction and mentorship to help startups manage the initial stages of growth. When seeking funding from venture capital firms, it’s essential to research their investment criteria and interests to ensure a mutually beneficial partnership.
Where to find: You can find venture capital firms and individuals online. Some sites will even present your business in front of potential investors and standalone firms. From there, firms or investors can contact you, giving you the chance to reply if you’re interested. Do some digging, ask around on LinkedIn for recommendations, and hone in on the investors that look best for you.
Business Loans
Last but certainly not least, you can opt for a traditional business loan. A business loan, or bank loan, is offered by a financial institution and typically comes with a set interest rate.
Bank loans can be used for a variety of reasons and are suited for virtually any business. Unlike other types of investors and funding on this list, loans come with the strictest requirements. Your business will need some kind of established credit history or proof of income, or a cosigner if you don’t have any credit history.
Where to find: Bank loans are available from virtually any financial institution, be it local, national, or online. The Small Business Administration (SBA) is a great resource to help you find suitable loans through partnering financial institutions.
Navigating the startup funding landscape can be a complex and challenging endeavor. By understanding the various funding stages, the investor landscape, and the importance of thorough preparation, you can position your startup for success and secure the capital needed to fuel your venture’s growth. With determination, persistence, and strategic planning, your startup can rise to new heights and achieve its full potential.
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How to find investors that will help your startup soar. Brex. 2024. https://www.brex.com/journal/how-to-find-investors
Miller, Mary Kate. How to Find Investors That Will Fund Your Business. Foundr. January 16, 2024. https://foundr.com/articles/building-a-business/find-business-investors
Rutan, Ryan. A Guide to Different Stages of Funding for Startups. Startups.com. https://www.startups.com/articles/different-stages-of-funding-for-startups?