Many startups go through various funding rounds, where they seek different types of funding.
Funding rounds can be necessary to get your company off the ground, invest in essential marketing and get market visibility, attract and retain the correct talent or help your product reach shelves.
It’s important for the entrepreneurs to understand some of the commonly used parlance and categories of investors, to evaluate the correct option for their funding needs.
A venture capitalist (VC) is a type of private investor who funds promising startup companies. Venture capitalists are often members of a larger venture capital firm. These firms often have boards that vote on which companies they will invest in.
Venture capital is usually given to small companies with incredible growth potential. This type of investment is not easily obtained and tends to be riskier, but VC investors get involved because of the potential for very high returns.
Traditionally, venture capitalists buy equity in a company, meaning they expect a payout in one form or another, if and when the company is successful. But, if your business isn't successful, the VC essentially made a bad investment and will receive nothing in return.
When you raise a funding round, you dilute your equity and issue shares to your investors. And if you need to raise additional rounds, you’ll reduce your ownership and control over the company even further.
Angel investors are individuals with the money to back startups and aspiring business owners. Unlike venture capitalists, angel investors are generally solo and not involved with a board or firm. But, similar to VCs, angel investors generally expect a return on their investment, as they’ve purchased some form of equity or ownership from your company.
The entrepreneur again is selling equity in exchange for funding. This means you may not have complete control over your business anymore, as you'll have to answer to the demands of your investor.
If you're looking to attract angel investors, you'll want to make sure your business is organized and you have a plan to move forward. Angel investors are typically considered part of the seed round of funding, meaning they provide funding for businesses in their early stages. This makes angel investors an ideal match for businesses with little more than an idea.
A business incubator, also known as an accelerator program, is a group that's dedicated to helping aspiring businesses take off. Incubators are generally founded and funded by other companies that want to help young business startups reach their full potential. Incubators often offer space for companies to work in, funding assistance, and even mentorship.
Virtually any early-stage business or entrepreneur can benefit from an incubator. Those with a solid business idea and team will get the most out of it, but even early stage startups that have barely left the ground can benefit greatly from the right incubator.
Private equity is when a group of investors makes a direct investment in a company. Private equity investors typically focus on mature companies that are past the growth stage. They will often provide funds to a business that’s in distress.
They will also sometimes buy out a business, improve its operations and then sell it for a profit. A private equity investor’s goal is always to make the company worth more than it was so they can generate a return on their investment.
One of the advantages of bringing on a private equity investor is that you’ll have access to the investor’s expertise. If they have experience within your industry, a private equity investor may help you find opportunities for improvement.
However, a private equity investor will usually take a majority stake in the company, which means they have a say in how the business is run. They have the power to get rid of executives or make major changes to the business.
Private equity investors have the power to sell the company if they think it’s the right move. Investors are on board to make money, so if the right opportunity comes along, selling is a real possibility.
Though each of the options listed above entails selling part of the equity by the entrepreneur to the investor, choosing the correct investor type does determine the involvement of the investor in the business and whether they are looking for a quick exit or long term growth of company.