The 4 Types of Investors Behind Almost Every Successful Startup
Pre-seed stages. Seed stages. Venture capital rounds. In just a handful of years, startup financing in Europe has transformed from mere bank loans to an elaborate, multi-layered system.
Because of this, today we distinguish 4 main tiers of startup investors based on how far the company has evolved at the time of funding, how big is the investment, and other factors.
Some of these investors are close friends with the entrepreneurs and have allowed, for better or worse, their feelings to affect their investment decisions.
Others are shrewd analytical thinkers who will do everything in their power to maximise profits, or will lend some of their investment funds in exchange for partial ownership of the company.
And then there are those who seek to provide entrepreneurs with tried and tested business advice in addition to the monetary aid.
But what all these 4 types of investors have in common is that without them, many of today’s successful startups would simply not exist.
In our previous article, we posed the question if one should invest in startups. If your answer was positive, then you will definitely want to keep on reading! Without further delay, let’s introduce the first group on our list—the pre-seed investors.
These are the individuals who give startups the initial spark needed to fuel their ambitious ideas. Depending on the goals, experience, and relationship with the founder/s of the budding projects, pre-seed startup investors are broadly split into two groups: triple “F”s and business angels.
If you know someone who backed up a project started by their friend, sibling, or another close person in their life, then you’ve met a representative of the FFF investor group, better known as Fools, Friends, and Family.
These types of investor relations can be quite risky since they often favour trust over sound analytical judgement. Of course, our investor may like to believe that they know the entrepreneur(s) well enough to have faith that they will not simply squander the money.
However, the reality is that, unless the deal is made official via a contract, there’s no guarantee that such an investor will ever see any returns unless they are absolutely certain that the entrepreneur has all required qualities to nurture an idea into a successful business.
Also known as business angels, these people are usually wealthy business leaders or former entrepreneurs who seek to back untested ideas with promising returns.
Since many founders have experienced the difficulties of developing an untested product or service first-hand, they often turn to angel investors for help via popular platforms like AngelList.
Most business angels tend to invest their personal capital without following a structured plan, and will usually be happy to simply receive their original investment with some interest on top.
Unlike the FFF group who will jump on virtually any train to support their loved ones, angels tend to do their research well in advance and only back startups that operate in a familiar industry.
This investor group backs entrepreneurs who have a finished product or service at their disposal, but who lack the funds to establish a company or thoroughly research their market niche.
Unlike angel investments which tend to be smaller in scale, seed investments can range from anywhere between £220 000 to £1 million. We distinguish two types of seed investors: equity crowdfunders and syndicate investors.
In popular crowdfunding platforms in the UK, such as Kickstarter and Seedrs, backers are offered material rewards in the form of physical or digital products or services.
Source: Pixabay.com | Photographer: Tumisu
Equity crowdfunding differs from this crowdfunding method in that it offers investors the opportunity to become shareholders and thus have some influence over the company they’ve backed.
Equity investors also tend to receive progressive returns, meaning that their income will steadily increase as the company grows in size and adds new products or services to its portfolio.
In syndicate investing, two or more angel investors team up and invest in the same company. Here is how this co-investing strategy works in a nutshell:
1. An investor with a good track record finds a promising venture and pays a portion of the pledged amount.
2. That person recommends the company to other business angels who trust the investor’s judgement.
3. The investors pay the remaining portion of the money, thus completing the startup funding round.
Venture capitalists (VCs) are professional investors who are at the helm of venture capital firms. The purpose of these companies is to raise money from pension funds, wealthy individuals and other limited partners.
The accumulated money is then invested into startups that have a working business model, but need extra venture capital to combat negative cash flow and profit from their work.
Like business angels, VCs target companies with great growth potential. Unlike them, however, they are risk-averse and only become interested in a startup if their ROI is high.
Since VCs are managing corporate as opposed to personal funds, they can often afford to invest sums that go way beyond the £1 million range, and developing firms can benefit from a series of VC rounds in exchange for preferred stocks and a reserved seat at the board of directors.
Similar to VCs, strategic investors’ main drive is to support companies that already have a working product or service, but are struggling to make their businesses profitable. In addition to this, however, they also provide additional support by offering:
– Business advise: many strategic investors have been CEOs themselves and can assist companies from a marketing, logistical, and even from a technological perspective;
– Powerful allies: even if the investor is unable to help the startup overcome a certain hurdle, they will certainly know someone who will.
Unlike VCs, strategic investors are willing to back experimental and riskier projects, although the money offered here is often much less (usually around £15 000).
These investments typically have a clear strategic purpose behind them, for example helping a company acquire a crucial technology or hiring a professional with solid expertise in the field.
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