For any entrepreneur or business owner, receiving the right investment to build and scale your business is central to success. And choosing the right type of investor to target will significantly improve your chances of being funded. Here is a look at some of the main investor types and what businesses or business goals they might be right for.
- 1. Private Equity Firms (PE)
Private equity firms focus on acquiring or investing in established companies. Their goal is often to improve operations, boost profitability, and eventually exit through a sale or IPO. Private equity is normally associated with leverage-driven deals and syndicated funding structures. However, the landscape is shifting and more investors are seeing the benefits of investing their own capital. Rami Cassis, founder of Parabellum Investments is one such investor in the private equity space. Rami believes that investing in this way helps to stimulate genuine entrepreneurship and sustainable wealth creation.
Private Equity firms fund well-established companies rather than startups. They invest large amounts of money, often in the millions and billions. They also provide more than just financial assistance. Many PE firms also offer companies operational and financial expertise to help them drive growth.
- 2. Angel Investors
Angel investors are individuals who invest their own money in early-stage startups. They are often willing to take risks on new ideas and are a vital source of funding and mentorship for businesses in their early stages. Many successful multinational companies initially benefited from an Angel Investor. For example, Google benefited from $100,000 of investment from Angel Andy Bechtolsheim in 1998.As they are individuals, Angels tend to invest smaller amounts than institutional investors do. They may offer startups mentorship and share both their industry knowledge and network which can be very valuable to startups. They choose which startups to invest in according to their personal interests or passions rather than simply looking at data to see which will give them the best returns. They tend to rely heavily on gut instinct or feeling to make investments as they don’t have the same resources as institutional investors, who have access to large data sets and sophisticated technology to assess investment decisions.
- 3. Venture Capital Firms (VCs)
Venture capital firms invest pooled funds into startups with high growth potential, usually in exchange for equity. They tend to focus on industries like technology, healthcare, and renewable energy.
VCs generally invest far larger sums of money than Angel Investors do – often in the millions. Similarly to angel investors, they bring additional benefits to startups other than financial ones. This includes their extensive expertise and market insights in a sector. They may also have a large network of resources and potentially beneficial contacts. As they invest a lot of money, they will expect significant returns and may push for aggressive growth strategies. This can leave startup founders feeling like they have lost control of their company and are answering to their investors.
- 4. Family Offices
Family offices manage the wealth of high-net-worth families. They tend to make their investments in areas that align with the family’s personal values and interests. This kind of investor is far more flexible and less formal than institutional investors. Family offices can be more flexible with deal structures, and they can make decisions far quicker without having to go through layers of fund managers.
Founders can build strong relationships directly with the principals, rather than going through layers of fund managers. This creates a more personal connection and can lead to deeper partnerships and more long-term partnerships.
- 5. Crowdfunding Platforms
Crowdfunding allows businesses to raise capital from a large pool of individual investors through online platforms like Kickstarter, Indiegogo, or Crowdcube. These sites allow founders to present their campaigns and reach potential investors worldwide with the hopes of raising a specific amount of money. Multiple investors or donors will contribute towards the total funding goal. This works well for consumer-focused businesses looking to generate buzz and validate their product while raising funds. This method also allows startup funders to keep more control of their own business rather than having to answer to VCs. However, crowdfunding campaigns do require a lot of effort, which can take the founder’s focus away from the business itself.
Final thoughts
Finding the right investor depends on a lot of factors and considerations. And the right investor for one business won’t be the right for another, even if they’re at the same stage of growth. Before looking for investment, make sure you consider your stage of development, specific funding needs, and long-term strategy. This will enable you to approach investors that truly add value.
