Startup investors come in various forms, including venture capitalists who usually invest large sums of money and angel investors who invest smaller amounts of money for a smaller stake in the company. Friends and family may also provide funding through small checks for a small stake in the company.
Crowdfunding platforms allow startups to raise money from large groups of individual investors. Incubators and accelerators can provide resources and mentorships to early-stage startups in exchange for a small stake.
Each type of investor has its own advantages and disadvantages, so it is important to carefully consider which type is best suited to your company’s goals.
Friends and Family Investors
Friends and family investors are people who are close to the founders and invest because of personal loyalty or interest. Although these investments may be small, they can be very important during a startup’s early stages.
These investors are often the first to contribute to the company, providing funding when the startup only has a concept, pitch deck or demo. The startup will use the funding to establish the company, hire contractors and build the first minimum viable product. Friends and family rounds are usually small, generally under $500,000, and mostly raised through Simple Agreement for Future Equity (SAFEs) or convertible notes.
Angel investors are wealthy individuals who invest their own money in startups in exchange for equity. They often bring valuable advice and a network of contacts, having founded similar companies themselves. They can be a valuable source of mentorship and funding for young companies and have a more hands-on role than other investors. They are typically more risk-tolerant and may invest in startups with higher potential but more risk.
Angel investors usually invest once the startup has a clear concept and a minimum viable product. Although their investment amounts can vary widely, angel investors typically invest no more than $1 million on their first investment in the company. They often use SAFEs or convertible notes for their investments.
In recent years, a new type of angel investor, called a super angel, has emerged. Super angels are high net worth individuals who invest larger sums of money than traditional angel investors. They may also be more involved in the startup’s operations and have a higher threshold for risk than other investors. Super angels tend to be more selective in their investments.
Venture Capital Investors
Venture capital investors are professional investors who manage large pools of money from various sources. They typically invest larger sums than angel investors and often have an active role in a startup’s operations, often taking a seat on the board.
Venture capitalists tend to be more experienced and knowledgeable about the startup industry than other types of investors, and they may provide valuable advice and guidance to startups. However, venture capitalists also tend to be more risk-averse and may demand a larger return on their investments.
Venture Capitalists most often focus on Series A funding and beyond, though some have funds specifically for seed funding. They tend to invest once a company has product market fit, has shown some traction in the market and needs capital to scale. Depending on the round, venture capital firms are generally investing $5 million to $50 million as an equity investment in the company.
Equity Crowdfunding Platforms
Equity crowdfunding platforms are online platforms approved by the Securities and Exchange Commission (SEC) that allow startups to raise capital by soliciting small, individual investments from a “crowd” of people. With equity crowdfunding, individual investors receive equity in exchange for their investment of working capital. This differs from donation or reward-based crowdfunding platforms like Kickstarter or Indiegogo, where funders may receive perks but not company equity.
Equity crowdfunding is becoming more popular because it is cost-effective and has a wide reach, allowing startups to tap into a larger pool of potential investors than traditional venture capital or angel investors. It can also provide startups with access to more specialized investors who focus exclusively on certain industries or types of businesses.
However, founders should be aware that running an effective equity crowdfunding campaign requires mobilizing the community around the startup to invest, often requiring a specific and sustained marketing effort. The amount of effort to raise an equity crowdfunding round is often higher than the effort required to raise a traditional funding round from venture capitalists. Startup founders should consider whether the effort is worth the capital.
Startup incubators provide a variety of services to early-stage startups, such as office space, mentorship, network access and occasionally funding. Additionally, incubators typically have strong connections with venture capitalists and other investors, which can be extremely valuable for startups seeking additional funding.
In exchange for its services, the incubator usually takes a small equity stake in the company, but the percentage of equity is usually much less than that taken by venture capitalists or angel investors. Incubators are a great way for startups to receive necessary assistance without taking on too much risk.
Startup accelerators aim to help startups get up and running quickly by providing resources, mentorships and sometimes funding. However, their programs are often shorter than those of incubators. Accelerators have specific criteria that startups must meet to join, such as having a working prototype or developing a minimum viable product. Additionally, accelerators may require startups to relocate to the accelerator’s city or region during the program.
Accelerators can be an invaluable resource for startups looking for rapid growth and success. They provide access to a wide range of mentors and experienced investors who can help startups achieve their goals faster.
As you’re seeking to understand the startup funding deeper, you may want to click here to check out our Founder’s Guides. Of course, if you’re looking for legal counsel to help guide you through the process, feel free to reach out to us here.