Types of Investors
Sometimes we hear stories about intrepid individuals using bootstrapping strategies and investing their own wealth and earnings. However, that strategy is usually unrealistic or downright impossible.
More often than not, fledgling startups need investors. If they don’t secure the required funding, their business is dead in the water before it begins.
But, it’s not only start-ups that need to secure investment. More often than not large corporates need capital for expansion or R&D.
When it comes to funding options, 4 kinds of investors come to mind:
1 Angel Investors
3 Personal investors
4 Venture CapitalistsUsually, these funds are used to introduce a new product to market, expand operations, or upgrade equipment and processes. But, each situation and investor is different, meaning entrepreneurs need to take care before contacting any investor.
Wondering which investor is perfect for your stock? Keep reading about 4 types of investors to consider when on the market for capital.
1 Angel Investors
Angel investment is something we know a lot about. These are typically individuals who use their personal funds, rather than the professionally managed pooled money of Venture Capitalists.
New studies are providing evidence that angel investments are less likely to fail than other traditional forms of initial financing.
Since angel investors are successful entrepreneurs themselves, sometimes they also mentor or advise the business in which they are investing. This usually means that angel investors are interested in industries they understand and have succeeded in.
The benefits of angel investment:
- Can provide much needed funding for a start-up/growth stock
- Gives the ability to raise capital in small amounts
- Flexible agreements and usually immediately implemented
- Opportunities for mentorship from experienced angels
- They are interested in high risk investments i.e. growth stocks
The objective of our campaign was to create consistent and quality investor awareness. We were able to analyse this using a variety of our analytic and tracking tools. The outcome speaks for itself; we were able to create the awareness needed to make hundreds and thousands of new investors research their stock.
Angel investors are options for small businesses and growth stocks.
2 Bank Loans
Possibly one of the more widely known forms of investment. However, due to the mortgage crisis in 2007, it is now more challenging for US-based start-ups to qualify for a bank loan. Low-risk companies usually stand a better chance.
The bank will typically want to see a comprehensive business plan. Included in your plan must be the following:
- A complete and concise description of your business
- A description of your products and services
- Future growth projections (financial and managerial)
You will also need to prove you are financially responsible. For the best shot, approach a bank you already have a business relationship with.
Banks are options for low risk businesses with a proven record of success.
3 Personal Investors
As the name suggests, personal investors include family and friends. In fact, personal investment represents the largest source of funding, investing over $66 billion annually with an average personal investment of $23,000 per project.
CNN Money states that personal investments should be governed by a contract just like any other. In doing so, it may prevent the inherent issue of mixing family and business.
Sign a promissory note spelling out the terms of the loan, as well as a separate agreement if a partnership is on the table.
Personal investors are options for anyone as long as you are strong enough to separate business from family.
4 Venture Capitalists
Venture Capitalists invest millions in companies by securing a share in the company. The average investment in each company is $2.6 million – larger than any other investment type.
This investor will work with a company who has a solid business plan and generally already has notable success. Very rarely do they invest in start-ups, as the perceived risk is too high.
When investing with a venture capitalist, business owners give up partial ownership of the company. They are often involved in the business decisions and will likely pay a higher ROI to this investor than the cost of interest on a traditional business loan.
When working with a venture capitalist, it is important to establish a detailed partnership agreement that indicates the rights and expectations of each party.
Venture Capitalists are options for established businesses looking at expansion with perceived lower risk.