How to Find the Right Investors to Fund Your Startup
Article written by The Crunchbase Team
It’s true. About 90 percent of startups fail, which means only 10 percent survive. There are many factors that will transform your startup idea into the business you’ve always envisioned. You need a fantastic idea that is unique in your specific industry. You need a business AND marketing plan. And, most importantly — you need the knowledge on how to raise capital and find investors.
Whether you’re crowdfunding or leaning toward the private investment market, choosing the right investors can make or break your company.
The Different Types of Investors By Company Stage
There is a variety of investment opportunities for you to consider when trying to acquire funding for your startup. Depending on where your business is at in its development, some funding options may make more sense than others.
In many cases, your company should seek to mix-and-match investment opportunities throughout the various stages to ensure that you have multiple, diverse capital streams. Here’s a deeper look at some typical private investment options based on company development stage:
Idea Stage
In this stage, the entrepreneur is still developing and fine-tuning the concept of the startup and needs funds to complete essential tasks such as creating a detailed business plan. Funds are typically raised through personal finances or close connections in this early phase.
Bootstrapping
You are the investor. At the Idea Stage, it can be difficult for companies to attract outside financing, so in many cases, it falls to the founder to provide the initial startup capital. While investing your own money can be risky, it also allows for complete control of the business void of any outside influence or conflicting visions.
Funding a startup with personal finances in the Idea Stage is also a way to safeguard yourself from debt should the venture not succeed. As the business grows, however, it is likely that you will not be able to sustain it with your own money, and will eventually need to bring in outside investors.
Friends and Family
Most entrepreneurs receive substantial financial assistance from friends and family in the Idea Stage. These tend to be the true believers in your project or those who are closest to you and want to see you succeed. While these ‘investors’ tend to be easier to handle and less involved in the day-to-day operations, accepting money from those closest to you can bring about personal tension and stress. Friends and family may not be checking regularly for a return on their investment, but they be will anxious to get their money back (and then some) as the company grows.
Pre-Seed Stage
In this stage, the entrepreneur needs additional funds to sustain current growth and to perform tasks like market validation. An entrepreneur can continue to rely on funding options from the Idea Stage in addition to exploring some new external avenues as well.
Pre-Seed is still a relatively new phenomenon in capital fundraising that has come about as a response to investors dedicating less money to new ventures in the Seed Stage. Entrepreneurs are continuing to refine their approach to funding in this stage as new lessons and best practices are being discovered regularly.
Crowdfunding
The great thing about crowdfunding for startups is that it opens up the opportunity for investment to literally everyone. By using websites such as Kickstarter, GoFundMe and Indiegogo, you can pitch your business idea or product and let people around the world donate money without having to cede any equity in your company.
Crowdfunding is a hands-off approach to investment when it comes to impacting your actual day-to-day business operations. While crowdfunding may seem like a grassroots approach, many startups have received millions in donations.
Incubators / Accelerators
Businesses in the Pre-Seed Stage that show significant promise can apply to incubators or accelerators to receive a number of benefits. In most cases, if your company is invited to participate in one of these programs, you can expect a state-of-the-art work environment, business mentorship, strong industry connections, and for the most promising ventures, seed funding.
Being accepted into a startup incubator or accelerator is very difficult as there is a significant amount of competition. Additionally, receiving funds is not a guarantee as many of these programs are designed to help an entrepreneur grow his or her business by providing mentorship and resources other than money.
Angel Investor
Startup angel investors are part of the private sector. However, angel investors are usually individuals rather than private firms, so investments tend to be smaller — think $25,000 to $100,000.
These players invest in you with the expectation of a high return on investment (ROI) and may choose to play a larger role in your startup by requesting input on daily operations. Angel investors may also ask for a seat on your board of directors.
Seed Stage
The Seed Stage marks the point in a company’s growth where all of the initial preparation comes to fruition and the business begins to acquire customers. For an entrepreneur, the challenge in this stage is to carve out a market share and to find a way to ensure repeated success. At this stage, a Series A funding round to raise anywhere between $1M — $30M will need to take place, which typically leads an entrepreneur away from individual investors and towards investment firms.
Venture Capitalists
These investors are part of the private sector and have a pool of money to draw from corporations, foundations, pension funds, and organizations. Investments in businesses that are rapidly expanding or have the potential for substantial growth can average $7 million depending on a number of factors. Venture capital investments are more common for tech and biomedical companies.
These firms will play a more active role in your startup, as they will receive some equity in exchange for funding, and will help provide expertise in guiding you throughout your development stages. Venture capitalists for startups can be utilized in the early or late stages of development as some specialize in working with companies in the Seed Stage whereas others may prefer to work with more established businesses. Venture capital is ever-changing and requires significant research prior to coming to terms with a VC on a funding round for your startup.
Venture Debt
This type of funding is only available to those entrepreneurs whose company is already venture-backed. Venture debt funding is essentially a loan that you will have to repay, regardless of if the company is profitable, without having to give up any equity.
Repayment terms can vary, but three years is the average. Venture debt is a great tool for short-term financing, especially for companies who need to make a one-time purchase and simply don’t have enough capital on-hand at the time, such as a retailer re-stocking for their peak season. Entering into a venture debt agreement should not be taken lightly. Missing a single repayment could force the company into being sold or liquidated due to unfavorable default terms that are typical of this funding option.
SBA Microloans and Microlenders
If you’re looking for a smaller investment, a microloan may be your best option. The Small Business Administration (SBA), a government entity, offers a program that connects startups to private lenders for loans of up to $50,000. Other microlending nonprofits are also available and can offer loans averaging $12,000 to $13,000.
Microloans are ideal for startups — think flower subscription companies and independent bakeries — that are just in the beginning stages of creation and in need of seed money. As far as how much input these investors may have, it can vary on a case-by-case basis. If you’re wanting total control of your business, be sure to clearly state your desired relationship and outline specific guidelines in the loan agreement.
Early Stage
In the Early Stage, entrepreneurs have established a sustainable sales model that has proven to provide the company with a consistent influx of revenue. Now, an entrepreneur must consider scaling the business to keep up with product or service demand. To raise enough capital at this stage, an entrepreneur will begin a Series B funding round with larger, later-stage venture capitalists, super angel investors, or revenue-based financing options. Like a Series A funding round, a Series B ranges from $1M — $30M.
Super Angel Investor
These investors can be seen as a hybrid between a regular angel investor and a venture capitalist. Super angels deal in larger sums of money, like a venture capitalist, ranging from $250,000 — $500,000 per investment, and look to partner with a company in their early developmental stages, similar to a traditional angel investor.
Where super angels differ from other angel investors is that investing in companies is their primary profession rather than it being a side-stream of revenue. Super angels are known as serial investors are always looking for new, profitable opportunities to invest their funds. It is not uncommon for several super angels to pool resources and establish an investment group.
Revenue-Based Financing
This type of funding is a good option for companies in the Early Stage that have demonstrated the ability to drive consistent revenue with high gross margins. With this model, a business receives upfront capital in exchange for giving up a fixed percentage of future revenue to the investor every month until the loan has been repaid in full.
For entrepreneurs who do not want to further dilute the equity of their company, revenue-based financing allows them to obtain money without losing any control. Because repayments occur on a monthly basis, however, you may find that you have less capital in-hand each month as a result of this agreement.
Growth Stage
The Growth Stage signifies that a company has achieved and surpassed several startup milestones and is looking to scale at an even greater rate by adding infrastructure and expanding operations.
For an entrepreneur in this stage, funding options can become more diverse as private equity firms and banks, who are more risk-averse in the early stages, will now be looking to invest in a proven entity. This round of funding is categorized as a Series C, which seeks $10M+ in the capital.
Private Equity
Part of the private sector, private equity firms invest in startups or businesses through shares or ownership in the company. A private equity firm usually raises funds for investments through large third-party investors such as universities, charities, pension plans or insurance companies. Startup private equity investors take a public company and make it private, resulting in 100 percent ownership of your business’ profits. Essentially, a private equity firm has the capability to buy out your company.
Bank Loans
Traditional bank loans can be a valuable financing option in the Growth Stage if you are able to secure favorable terms. Banks typically provide business startup loans with the lowest interest rates and will not be given equity in the company.
Bank loans do have an in-depth application process and require a strong credit rating. In extreme cases, a bank may mandate that you sign a personal guarantee on the loan, which means that they can recoup their losses from personal assets should there be a default on the repayment.
There is no shortage of funding options when it comes to your startup. Detailed research is required at every development stage. Ensure that the best decisions are made to meet your company’s specific needs, align with your goals as an entrepreneur, and provide the best chance of future success.
Where and How to Find Investors
Network, network, network. When you meet the right people, a wealth of opportunities can appear right before your eyes. If you’re creating a startup, be sure to network with people in your industry. Attend all the industry events possible, even if you think you’re underqualified or if your business doesn’t yet exist. You may or may not find investors, but you’ll definitely accrue knowledge from fellow startup owners or business veterans. Try to create relationships that may benefit you in the future.
Online resources such as Crunchbase Pro take valuable investor and business information and pair it with our extensive database so you can easily filter and review the information that is most relevant to your business. Using a company database tool takes the load off when conducting extensive research within your industry since it’s available all in one platform.
Source: Crunchbase
MOST 2414 is a digital marketing agency and consulting firm based in Bangkok.
