Securing investment and choosing the right investor for your startup is critical. A bad investor can cripple a startup’s progress and affect its ability to grow. Raising capital is time-consuming. So it’s important that you are using this valuable time to raise from appropriate investors. We’ve provided an overview of the key features of each type of investor to help you determine who to approach with your pitch and when.
1. Friends and Family
Easy access to smaller scale investment is extremely valuable for a cash-strapped startup in its early days. Friends and family will generally be happy to invest via a convertible note, and are likely to be less demanding when it comes to negotiating the terms of the investment. Be sure to be upfront with your investors – no matter how much of a sure thing you think your business is, they should be aware of the risk that they could ultimately walk away with nothing.
Crowdfunding allows startups to access capital from a broad net of people while simultaneously marketing your product and testing your model. If your startup is building a product, a Kickstarter campaign can make a lot of sense. Individuals and companies will pay for the product before you develop an minimum viable product. Your startup will get upfront cash to fund R&D, and you’ll then send the products to your funders once you build it. It’s important to note that equity crowdfunding (i.e. issuing shares in your startup to ‘the crowd’) is not currently legal in Australia.
3. Incubators and Accelerators
Incubators and accelerators primarily support early-stage startups through both the provision of small scale capital and access to mentorship and growth programs. Accelerators, as the name implies, focus on scaling your startup quickly. An accelerator will invite a startup to join a specific program which will involve mentorship, training (maybe even a trip to Silicon Valley), and will be for a particular time. All successful participants are likely to receive the same amount of funding for the same percentage of equity.
An incubator is more mentor focused, and there may not be a time limit on your relationship. Often, incubators will invite startups to work from their premises where they receive the opportunity to network with other founders and make industry connections. Accelerators and incubators often look for a particular type of startup, so it is worth doing your research to determine which incubator or accelerator is the right fit for your business.
4. Angel Investors
Angel investors are high net worth individuals who invest in startups early on (seed or series A rounds). These are people who you will likely meet through your networks, and they will commonly offer capital in return for equity or a convertible note. You would expect angel investors to invest anywhere between $20,000 – $200,000 into a startup and potentially take on a mentor role. While angel investors usually participate in the first couple of rounds of investment, it is still important to have a strong business plan and growth model when pitching to these types of investors. What angels will be looking for above all else, however, is your potential as a founder and the likelihood that you’ll be able to get them a return on their investment.
5. Venture Capital
Venture capital firms (VCs) commonly invest in startups once they have gained a certain amount of traction and are growing quickly (although some do invest in seed rounds). VCs will generally provide larger sums of money to startups than angel investors but can sometimes ask for a lot more in return. Attracting interest from a VC commonly involves warm introductions and a great pitch.
A VC’s primary focus is on generating a return on their investment. This emphasis often means that they will want to have more control over your business. They will want to ensure the founders are locked in and incentivised, and they will want to protect themselves by having preference shares, voting rights and a board seat.
If you are fortunate enough to be in the position where a few VCs are interested in your startup, it is prudent to do your due diligence to ensure that you choose one which is the right fit. You may wish to speak to other startups they invest in to find out what they are like to work with (particularly startups which didn’t succeed) and how helpful they were. It also helps to understand how the firm is structured and who you will be dealing with on a regular basis.
With any type of investor, it is important not to put all your eggs in the one basket. Speak to as many different investors as practical. Not only will this increase your chances of finding the right investor (because let’s be honest, you will likely have your fair share of rejections) but it will also help you perfect your pitch.