So, you’re an entrepreneur with an extraordinary idea for a startup which is surely going to disrupt the existing market; and now all you need is some funding to convert this idea into an ideal business.
But the big question is –
Who will fund your idea and why?
Generally, entrepreneurs get help from different startup funders at different growth levels of a startup. During the initial stages, when the idea needs to be validated and the business is yet to be started, the founders either use their personal savings or get funds from their friends and family.
As the startup grows, different investors come into play, starting with seed investors (angel investors) who invest in the idea and the team, and moving towards venture capitalists who judge the past records and the future strategies to fund the startup in return of some equity.
However, many startups take different routes altogether. Some go for crowdfunding, some take loans, and some even bootstrap. But even though bootstrapping work for some time, you’d eventually require money to make more money when the business grows, when the demand increases, or when you need to scale.
If you’re one such entrepreneur looking for funding for your startup, here’s a list of the types of investors who’ll help you during your entrepreneurship journey.
Friends & Family
Friends and family members are usually the first investors of your startup. They may or may not ask for equity while investing and invest in your idea solely because they believe in you and your vision.
This investment may not be much monetarily (it may range from $1,000 to $200,000) but it can be a huge morale booster for you and your team. Moreover, this investment can prove out to be very useful to validate your idea by releasing an MVP or a prototype before taking your idea to big investors.
Banks & Financial Institutions
Many entrepreneurs prefer debt over investor funding, mainly because it doesn’t dilute their decision-making power.
Many banks and financial institutions provide startup business loans and small business loans at competitive interest rates. Even though the money lent isn’t as much as provided by angel investors, it can be a good start for those entrepreneurs who –
- Believe their startup’s operating profit will be enough to sustain for the long run.
- Want to kickstart their startup till the time they secure good funding from an angel investor.
Disrupting the existing industry isn’t easy and the top officials understand that. Therefore, the government of many countries provide special grants to startups involved in certain sectors which will eventually benefit the economy or growth of the nation.
A simple Google search can help you find a suitable government grant you can apply for.
Angel investors (or seed funders) are high net-worth individuals who invest in startups in their early stages in return of some equity in the company. The main motive of their investment is to generate good profits when the startup grows and its value rises.
Besides providing monetary help to the early-stage startups, these angel investors also provide much wisdom and networking opportunities to the entrepreneurs.
Angel investors can be approached directly either online through emails, Linkedin messages, etc. or offline during networking events, or with the help of mutual connections.
Angel groups are groups of angel investors who usually work together as a group to evaluate and invest in startups.
Usually, such groups focus and invest in startups belonging to a concentrated geographic region, industry sector, and/or a combination of both depending on the group members’ expertise.
Since angel groups invest a pool of investment pitched in by the members, they are able to provide in larger investments as compared to an individual angel investor. According to the The Angel Capital Association, the median investment per round per angel group is usually $277,000.
However, unlike angel investors, angel groups require approvals and evaluations by the members which result in time-intensive evaluation periods, insufficient actual investments, and investment terms that may not be correlated with market terms.
Incubators & Accelerators
Both accelerators and incubators offer you much needed support for your startup. Startup incubators are not-for-profit organisations which incubate your startup idea and prepare you to effectively lead your company in the long run by providing help in kind, which includes infrastructure, networking, advisory, manufacturing aid, training and guidance. Even though this doesn’t count as an investment, it surely saves a lot of your money especially if you’re running a very early stage startup.
Startup accelerators, however, are for-profit organisations which provide fixed-term, cohort-based, and mentorship-driven programs which include seed investment, networking, and learning. In return, accelerators take percentage equity of the startup.
Many entrepreneurs prefer seed accelerators over angel investors as these accelerators provide way more than just seed investment to their venture.
Many startup fellowships like Thiel, Baltimore, Kauffman, etc. provide grants and awards to the entrepreneurs who they deem fit for the same.
Even though selection to such fellowships is harder than approaching an angel investor, you should give them a try as most of such grants (ranging as high as $100,000) don’t come with any strings attached and your decision-making power doesn’t dilute.
Here’s a list of 8 best entrepreneurship fellowships to help you with the same.
Venture capitalists are very high net-worth individuals or firms which fund early-stage startups in exchange for an equity stake. Venture capital comes after seed investment and these firms usually invest in startups which have validated their business ideas and have proven their reason for existence.
Besides monetary investment, VCs also provide guidance and direction to the companies they invest in and take an active part in the decision-making process too.
However, not every startup succeed in getting funds from VCs. The process is very long as it involves a lot of examinations from the investors’ side.
Less than 1% of companies succeed in securing venture capital.
Venture capital is a required investment as after a certain stage, startups require a large sum of money which banks are not willing to lend because of the failure rate of startups (9 out of 10 startups fail). And if they do give the loan, they charge very high interests which many startups can’t afford.
Crowdfunding is a slightly new investment option for entrepreneurs to finance their startups. Thanks to startups like Kickstarter, Indigogo, etc., you can now go away with the traditional ways of raising funds and raise small amounts of money from a large number of people to finance your startup.
The best part?
You don’t have to dilute your equity.
This type of investors invests in your startup because they get something in return, which is usually your product or service delivered to them before the actual launch. You can even decide the minimum investment for your startup and the perks the investors will get.
If you’re new to the concept of crowdfunding, here’s a detailed guide to launching a successful Kickstarter campaign for your startup.
Peer-to-peer lending, also called crowdlending or P2P lending, is a practice where entrepreneurs get loans directly from the individuals by using an online platform which matches borrowers with lenders.
These online platforms have low overhead costs than financial institutions and banks which makes it possible for them to provide high interest to the lenders and low interest to the borrowers. Most of the loans offered on these p2p lending platforms range from $1,000 to $40,000 and have repayment periods of approximately 36 months.
Such platforms are a good alternative for those entrepreneurs who are looking for funding as a debt but can’t take loans from the banks.
Corporate Venture Capital
Large companies like Intel, Microsoft, and Qualcomm, etc. have dedicated departments that focus on investing the capital funds into startups that may prove beneficial to the company in future.
This process is known as corporate venturing.
Often, it’s not just equity that is traded in such investments. Usually, corporate investors also use the disruptive idea, innovative technology, or the out of the box talent of the startup to diversify, fend off industry changes, and increase their revenues.
While many entrepreneurs consider this as raiding of their brain-child, many welcome corporate investors as allies who help them take their business to the next level. Many even plan corporate investment to be their exit strategy.
Family offices invests funds on behalf of high-net-worth individuals or extended family of high-net-worth individuals.
These work in a manner similar to angel investor and angel groups but are often less specialised when it comes to startups.
Registered Investment Advisor
A registered investment advisor is a financial professional hired to manage investments funds and financial decisions on behalf of high-net-worth individuals.
These advisors also sometimes invest in startups if they or their client see any benefit in investing in such startups.
Funding isn’t limited to equity and debt anymore. There are numerous ways to get your startup funded including the out-of-the-box options like crowdfunding and crowd-lending. However, some of these options unlock only once you’re ready with your product.
That being said, make sure you’re clear with what and how much your startup needs (and deserves) as it’ll make your startup investment decision easier.
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A startup consultant, dreamer, traveller, and philomath. Aashish has worked with over a 100 startups and successfully helped them ideate, raise money, and succeed. When not working, he can be found hiking, camping, and stargazing.