scaalex TYPES OF INVESTORS

startup-funding

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An investor is a person who contributes money to a business with the expectation of receiving a financial return in the future. The main aim of any investor is to earn maximum profit with minimum risk. Most startups depend on investors for funding their startups. Whether the business is introducing a new product or expanding its operations, the investor’s fund will contribute enormous support for the company. Investors help businesses get funded and ensure that the capital invested is correct, oriented towards either value or growth strategies. All investors are not the same; they may vary according to resources, capital styles, risk tolerance, motivation. The investor’s quality and level of involvement determine the success or failure of a startup. So, it is necessary to understand different types of investors and learn how to choose the right one. Let us look at the quick view of types of investors:-

1. Personal investors:

The first type of investor entrepreneurs should be approaching personal investors, including family, friends, close acquaintances. This type of investor is more suitable to get the company off the ground. They may not provide much money simultaneously; there is a limit to how much they can invest in your startup. The best thing is that they know and trust you the most. But there is a need for heavy documentation for helping you out, which outlines the rate of return, size of the investment, ownership arrangements. Therefore, Ensure to consult a lawyer to avoid obstacles if any.

2. Peer-to-peer lenders:

Peer-to-peer lenders are individuals or groups of individuals who provide capital to small businesses/startups. Arranged through websites where owners have to apply with peer-to-peer lending companies like Prosper and Lending club for getting their desired money. Startups need to develop a business plan and share their financial forecasting, market research, industry analysis. In some instances, you will ask to share how much you have invested so far. The potential peer-to-peer investors will access the creditworthiness of the company. Once approved, both owner and lender (private individual) negotiate an interest rate for the investment, and then the lender supplies the funds to the owner.

3. Angel investors:

Angel investors (also called seed investors, private investors, business angels, angel founders) are ex-founders who invest their own money in startups or new entrepreneurs. They are the primary source of funding and the most active type of investor that many people may have heard about before. They may be wealthy entrepreneurs, business professionals, and corporate leaders. The best part of angel investors is that invested funds don’t have to repay in business failure. But at the same time, investment is generally risky and does not represent more than 10% of an angel investor’s portfolio, say 1 out of 10 deals. An angel investor supplies funds with the expectation of getting a higher rate of return (that is, equity position and handle the company’s management decisions). They are always high net-worth individuals focused on helping startups to grow in the initial stages and foster innovation, thereby gaining credibility and acceptance in their industry. They also used to advise the business that they are investing in. They can be approached directly online, through an introduction from other startup founders, or at live pitch events. Before attracting angel investors, startups ensure that their business is assembled and plan to push ahead.

4. Venture capitalist:

A Venture capitalist (VC) is a person or firm that provides funds to startups with long-term growth potential.  Generally, venture capitalists are large venture capital firms such as well-off investors, investment banks. They focus on companies with a solid business plan and high-profit returns (growing companies); thus, they expect partial ownership of a company and overall management decisions. VCs have relevant experience and connections with other investors, industry leaders. Startups may tend to choose venture capitalists as they get both open funding and advice from experts. They are not interested in risky startup companies that require a small number of funds to get started. They invest in a high volume of deals, say 1 out of every 100 deals, compared to angels who invest in 1 out of 10 sales. They conduct considerable due diligence, a process that requires up to 5 months for each investment. VCs might be your best funding option if you need a good cash infusion to get started.

5. Incubators and Accelarators:

Incubators are collaborative program designed to help startups for bring out innovative ideas with access to funding opportunities, training, guidance, mentorship, and networks. Whereas, Accelerators are program that help startups for rapid growth with financial support, training, mentorship, and networks.

6. Banks:

Startups seek the help of banks to cover their small business loans. For early startups and businesses, it is very challenging to qualify for a bank loan. Typically, banks ask for an overall business plan that includes a detailed description of the company’s product/service, financial and management projections, plans for goal implementation, and then decides whether it is interested in providing funding in the form of a loan. You need to show that you’re financially stable. In addition to banks and other financial institutions, you need to research the loans guaranteed by Small Business Administration (SBA). SBA loan programs include;

  • 7(a) loan: 7(a) loans meant for purchasing equipment, inventory, working capital, real estate purchasing.
  • Microloans: Microloans consist of a loan amount with a maximum of $50,000 for purchasing equipment, inventory, working capital. The real estate already purchased or debts already arise does not come under this category.
  • 504 loans: 504 loans are needed to expand the operations of startups say acquisition of fixed assets like land and building, real estate,  modernization of existing facilities, debt refinancing.

Hopefully, now you will be aware of the types of investors for funding startups. Every startup/company is unique. That is why choosing the right kind of investors is very vital for your startup. Select the best by assessing where your business stands and what is suitable for you and your startup. It is the area where most startups fall short. Worried? Don’t be! Get started with our expert’s help. We ensure your new business gets off the ground properly.