When many startups think of “investors”, they think of a commercialized image of the term. Often that image is a tech-savvy Silicon Valley VC, or a hard-nosed mogul from a network show like Shark Tank. However, there are several different types of investors that help startups reach success.
Understanding the variety of investor types available is important for any founder. Entrepreneurs tend to associate “investors” with “funding”. However, most investor solutions revolve around more than just monetary funding. Investment usually includes mentoring, connections with target customers, or help with hiring. This means that the type of investor you may need will vary with what your pain points are currently.
The common types of startup investors include:
- Angel Investor
- Venture Capital (VC) Investor
- Corporate Investor
Let’s look at the different types of investors.
First, it’s important to clarify a common misconception about angels. Some people mix “friends and family” investors with “angel investors” because of the timing in which they invest. Both types of investors can get involved in the stages where a startup is struggling to make a profit, make revenues, or even make a proper prototype. However, they are not interchangeable terms.
Angel investors are individuals who invest in a startup at the seed or pre-seed stage. They are typically not a friend or family member of the founder. Friends and family raises are often comprised of supportive people in the founder’s life who want to help. These individuals may offer quick funds on good faith terms to gain money or equity back in the company in the future. This may happen with no formal contracts and tends to occur in the pre-seed stage.
Meanwhile, accredited angel investors are defined by criteria established by the Securities Exchange Commission (SEC). They tend to invest in younger startups and may be one of the first formal investors who become involved in the business. Angel investors are those who invest using their own funds and will offer connections and resources that may be helpful to the startup. Angel investors are interested in helping you grow your startup so they can see a return on their investment. The investors on Shark Tank are examples of angel investors.
Venture Capital Investors (VC)
When looking for different types of investors, securing venture capital (VC) investment is also an option for startups to consider. The VC route makes the most sense when a startup has big potential for high returns in the long run. Instead of being funded by a single individual, a startup will be funded by a VC firm with a pool of money from multiple investors.
VC firms have a thesis or a clear set of parameters that show what they want to invest in. The thesis outlines the industry, sector, or type of solution they want to fund. Sometimes, the thesis will include early-stage startups. Other times, the thesis will show they prefer more established businesses, and may only invest at the Series A or B stage. A startup should make sure their business fits well within the thesis of a VC firm before making contact.
A Corporate Investor is an entity that is partnered with an established business to fund new ventures. Today, the majority of Fortune 100 companies have a division dedicated to investing in new startups.
These are sometimes deployed as accelerator programs or as incubators. Companies like Goldman Sachs, Schneider Electric and Volvo all have their own investment arm.
Startups can gain great success by partnering with a corporate investor. Often, one of the largest benefits is access to the corporations’ customers and supply chain.
For instance, a startup with a new solution for engine efficiency may be able to succeed best if they partner with a car manufacturer, instead of aiming for an angel or VC investor solution. The corporate investor would allow the startup more access to testing their idea in the market more quickly, using its own customers and manufacturing facilities to do so.
Which Investor Type is Best?
Each of the different types of investors offer distinct advantages. Angels often invest as a very experienced and well-connected individual and serve as an early mentor. Meanwhile, VC firms can help with hiring and team expansion in the short term, and provide larger amounts of capital long term, as well as strategic guidance for exponential growth. For reaching the business-to-business (B2B) market or a sector with a long history like transportation or energy, a reputable corporate investor would bring great value.
For a startup, the best investor type depends on what the overarching goal is for the business. It also depends on the industry it operates within and depends on the short term and long term growth potential.
If you’re looking at different types of investors and are in need of support finding the right investor solution for your business or idea, reach out for a free consultation to get clarity for your situation.