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Most companies on the rise often need some kind of external financial aid to help their businesses get off the ground, and while there are endless opportunities for garnering funds it is often difficult to get money out of people’s pockets and into your business. This article covers various kinds of investors that are there and other sources of funding for you to consider.
3 Types Of Investors You Need To Know About
Most investors offer equity funding, meaning that they assume a certain amount of ownership of your company in exchange of their investment. Normally, their stake depends on how much they are injecting in your company. Investment funding is often a great option for many startupers as most companies need a lot capital to get started. It also comes with a lot of perks that I shall discuss later in this article. However, keep in mind that investors tend to set the bar high in terms of what they expect in returns from their investments, usually in the first 5-7 years of your business being in operation. So, ensure your business is likely to scale up in that span of time.
Angel Investors
Angel investors/angel groups are individuals or a group of individuals who have money to spare and choose to spend it by investing in companies, usually early-stage companies, in hopes of making profits from their investments. Many times, they invest in companies that haven’t been able to secure funding from other sources, hence the name ‘’angel.’’ Angels are often already established entrepreneurs. Therefore, they understand the risks startup owners have to take to grow their business hence why they are willing to invest in such companies. Having an angel investor on board comes with many benefits, some of the best being their expertise, connections and knowledge given their experience in entrepreneurship. They are the kind of investors who will not only give their money, but also their advice. There is a catch, however. Most angels rarely take a hands-off approach. What this means is that they normally get directly involved in your company’s decision-making processes or if not, they require explanations of the activities of your business. This is understandable as they have chosen to risk investing a vital resource to your business and it is therefore in their best interest to see the company thrive.
Venture Capitalists
Venture capitalism is a private financing method that could either come from an individual or a firm. Venture capitalists don’t use their own money but instead source it from investment companies, large corporations and pension money. They invest in a company that is at any stage of development. In exchange of their investment, they often require a stake in your company. Securing VC money is often very difficult. In the United States, venture capitalists only fund 0.05 % of startups. This is a small number considering there are 543,000 business started each month. They only invest in companies that exhibit a high growth potential. So, what are some of the things VCs consider before investing?
Character of founder and partners – everyone desires to work with a team full of personable people. It is to a business owner’s advantage if he and his/her team possess traits like reliability, honesty, ambition, empathy, professionalism, friendliness etc.
Dexterity of team members – a VC has to be confident in the ability a founder and his/her team to deliver the best results that will in turn give them tons of profits. So, ensure you and your team members are very good at your roles and what you specialize in.
Unique idea – venture capitalists hear tons of business ideas every day. To get their attention, therefore, you must stand out. Having a unique innovation will help you to do that.
Service – people are more likely to support solutions that benefit society. This is no different for VCs. Having a solution that alleviates people’s problems at a large scale will draw your investors further to supporting you.
Longevity – the primary driving force VCs to invest is to make profits. For this reason, they are more likely to invest in companies that will last long in order for them to reap benefits from their investments for a long time.
Return potential – if your company exhibits signs of making huge amounts of profits, it is likely to draw many investors since their main goal, often times, is to make profits from their investments.
Banks
Banks are also an investment option for entrepreneurs. Their investments come in the form of loans, business credit cards and more. However, they tend to invest in companies that have already gained traction. Unlike the venture capitalists and angel investors, banks will require you to pay back their loan regardless of whether or not your business succeeds.
Way To Raise Money For Your Startup
Besides investors, there are other ways to raise money for your business.
Crowdfunding – this refers to raising money from a large group of people who each contribute to the overall funds your business needs. Crowdfunding can be equity-free or with equity. Equity crowdfunding is the kind that normally takes place online. Here are the types of crowdfunding:
Equity crowd funding – people who decide to contribute to funding your business will have a stake in your company. For such crowd fundings, one must be at least 18 and fulfill other requirements such as proving they are financially able to invest in a company. There are also limits to the amount one can contribute, hence the size of their stakes. A popular crowd funding site is Kickstarter.
Debt crowd funding — this is like a taking a loan. A group of people will contribute towards a company’s capital and in return, the company will pay the contributors their money back and with interest over time.
Reward crowd funding – this is when people invest in a company/project they are passionate about and get rewarded in non-monetary ways such as through gift cards, free tickets or a product.
Donation crowd funding – this is when people invest for a charitable cause.
Bootstrapping – this is a self-funding method where a business owner funds his/her company from personal savings or sales from a product or service. This may seem like a steep source of funding but it may work in some cases. It is also less risky than other sources.
Competitions – there are often thousands of competitions held for entrepreneurs at any stage in their business to showcase their ideas and get funding if they make the cut. The best part about competitions is that some of them are equity free. Besides, many of them offer other ways of support for the businesses that don’t qualify to get funding. For example, instead of money one can get tickets to a business summit, access to an incubation program or electronic devices. Opportunity Desk is a great platform from where to find out about such opportunities.
Friends and family – fund raising from your social circle can be a good source of gathering funds. Friends and family are a huge pool of investment and can help to take your business a step further by offering capital and spreading word about you.
You have come to the end of today’s article. Let me know your thoughts in the comments section or forum. If you wish to learn more about the art of startup fundraising, pitching to investors, negotiating a deal, and everything else entrepreneurs need to know, you can do so here.