Investors play an integral role in determining the success of a startup. Not only do they provide much-needed financial resources, but they’re also a great source of knowledge and business acumen. In a way, choosing an investor is similar to choosing a partner. That’s why picking the right investor is key to your startup’s growth and success.
In this blog, we cover the benefits of having an investor, the main types of investors, and how to pick the right investor for your business.
Why investors matter to your startup
As a founder, you’ll face a steep learning curve as you deal with everything from developing your product and getting it to market, to recruiting, bookkeeping, and fundraising. Chances are, you wouldn’t have much experience in these areas and you’ll be overwhelmed with the nitty-gritty.
This is where having investors with capital to offer can spur your startup’s growth. More importantly, their business acumen and wealth of experience can accelerate your momentum toward Series A and beyond!
A good investor can:
- Provide both capital and expertise, especially if they’re well-versed in your industry or have experience running their own businesses.
- Motivate the team by inspiring them to set higher goals.
- Keep you accountable and focused on those goals.
- Connect you with valuable contacts. Working with someone well-connected can open doors to experts who can help you grow in numerous ways.
- Boost your reputation. Having committed investors is a sign to other key industry players that your business has promise.
The different types of investors
Broadly speaking, investors tend to fall into six main categories. Each has advantages and disadvantages, so do think carefully about which type would fit your business at your current level.
1. Personal investors
Personal investors are one of the first people new startups often look for and are often friends or family members. While engaging them is an ideal way to get your business off the ground, it’s also good practice to properly explain your plan and provide thorough documentation.
2. Angel investors
Typically individuals with disposable funds, angel investors often invest in rising startups in exchange for shares. As they tend to work closely with founders, angel investors contribute to your startup’s long-term future and are an excellent source of early funding.
However, do anticipate questions about downside protections from angel investors. Just like venture capital firms, angel investors today are keen to hedge the risk of volatility and protect their investments.
Crowdfunding is the (relatively) new kid on the block, with platforms like Indiegogo, Crowdfunder, and Kickstarter emerging as major funding sources around the early 2000s. While crowdfunding gets you higher valuations and more control, the payoff depends heavily on your product’s popular appeal. For example, businesses in the consumer goods industry might find crowdfunding more successful as they can tap into a large customer base and improve market share.
However, do anticipate a higher time commitment due to the sheer number of investors involved. Not only might these investors come to you personally for information, but juggling so many investors may result in a crowded cap table that is difficult to manage effectively.
4. Incubators and accelerators
Startup incubators and accelerators like Techstars act as a springboard for early-stage startups to help them achieve profitable growth. Some provide funding, but most work by connecting you to seasoned startup veterans who can provide practical advice on finding funds, developing products, and building your organization.
Incubators are not typically intended to be a primary capital source. They are careful about choosing applicants and will normally charge a joining fee. Instead, consider them a valuable resource that will escalate your business to the next level.
Established startups may consider applying for traditional loans. Once you’ve reached a certain level of revenue, banks will start lending against your revenue and provide debt financing based on your revenue and contracts.
Banks tend to be most concerned about risk and are often unwilling to lend to startups without meaningful revenue. They require extensive documentation and financial information before issuing loans, so be prepared. You should also do research beforehand and determine the right type of loan for your business.
6. Venture capital (VC)
Venture capitalists and firms are private equity investors who provide capital to businesses in exchange for equity. As these investors invest sizable amounts of money into a business, VCs only become an option after a startup already has serious backing and demonstrates high growth potential.
VCs aren’t necessary for all businesses. However, they’re an option for startups looking to commercialize and can benefit from extremely fast scaling and high amounts of capital. In return, expect tough terms and downside protections.
How to find the right investor for your business
A bad investor can lead to consequences ranging from poor financial management to reputational damage that can turn other investors away.
To find fitting investors, here are some traits to look out for:
1. Do they have good connections with your industry?
You’ll be relying on your investor for more than just capital. A good investor should be able to demonstrate baseline expertise in your industry and possess deep knowledge of how your business should operate.
2. Do they have a solid track record?
Look for investors with a portfolio and proven record for actively amplifying companies and helping them to scale. Learn about their previous investments and how they’ve handled other startups.
3. Do you feel a good personal rapport with them?
Don’t underestimate the importance of chemistry. An investor should be someone you want to talk to, work side by side with, and learn from during the highs and the lows.
4. Are they aligned with your values?
If your startup is mission-driven, you’ll need investors that not only contribute to your bottom line, but also augment what you stand for, whether it’s to remain sustainable or commit to a higher standard.
Attract the right investors to your startup
Investors favor resilient and adaptive teams with long-term promise. They’re looking for a history of effective teamwork and efficient execution, not just a great idea.
They’re also looking for more than just a business plan. They want to see up-to-date cap tables, audit-defensible 409A valuations, and transparent communication with shareholders. LTSE Equity can help you prepare to meet expectations, no matter who you’re talking to.