The Different Types of Investors for Startups

By Fernando Berrocal

Investors have a unique role in an organization's development. The extent and quality of their engagement can ultimately decide if a business eventually succeeds. Aspiring entrepreneurs must understand the many types of investors available and the best practices for how to approach them for funding.

Types of Investors for startups

Different Types of Investors: Investors can be enlisted at practically any point in a startup's life cycle. The most popular categories of investors for startups are listed below, along with suggestions for when they should be considered.

  • Banks: According to incorporations, banks are a traditional source of business loans. Before a loan application is granted, borrowers are expected to provide proof of collateral or a source of income. As a result, banks are frequently a better choice for more established enterprises.

  • Venture Capitalists: Only after a business has generated a large quantity of income does it turn to Venture Capitalists. These investors are remarkable because they often contribute a large sum of money. They make the majority of their money through "carried interest," which is a percentage of a private equity organization's profits that they get as compensation.

  • Personal Investors: Entrepreneurs sometimes rely on family, friends, or close acquaintances to invest in their businesses, especially in the early stages. According to Legal Zoom, there is a limit to how many of these people may invest in businesses due to legal restrictions. While it may be simple to persuade family members to assist, extensive documentation is strongly advised.

  • Peer-to-peer lenders: These are individuals or organizations that provide finance to small business entrepreneurs. These entrepreneurs apply to businesses that specialize in peer-to-peer lending, such as Lending Club, to work with these investors. Lenders can choose which businesses to assist once their application has been accepted.

How to choose the Proper Investor for your Startup:

Recognize the many investing possibilities available to you: Entrepreneurs may raise funds in different ways than from investors when starting a business, according to Forbes. Personal savings and personal borrowing are two popular methods for doing this.

  • Personal Savings: Savings accounts in cash and cash equivalents, as well as retirement accounts. It may be beneficial to use your funds. The money needed is already on hand, and there is no need to take out a loan to get it. Personal savings may be a challenging path to follow. Entrepreneurs frequently seek out investors firstly because their funds are insufficient. Many individuals find it difficult to risk the money that they may need for other purposes in the future, such as retirement or personal obligations.

 Investor types for new businesses

  • Personal Borrowing: Entrepreneurs with a high personal net worth and a good credit score (700 or higher) might benefit from personal borrowing. These individuals may take out a personal loan or apply for a new credit card to get funds for their new business. The danger is that you will fall behind on payments, which will reduce your credit score and cause you to go further into debt.

Decide on what you want from your Investors:  Choosing an investor entails more than just attempting to get money. It also entails an amount of dedication. According to Entrepreneur, before approaching a certain investor, you should assess the competence you require and your expectations. When it comes to possible investors, think about their previous transactions, the services they may offer, their expectations of business leaders, and how active they want to be in business operations.

You must know where to search: Although obtaining investors may appear difficult, it is merely a matter of looking in the proper places. To get started, you can use investor databases like AngelList or Angel Capital Association. Self-promotion is also beneficial. Investors may instead target entrepreneurs as a result of writing blog entries, networking, and participating in community business activities.

Make a shortlist of Investors: To increase your chances of obtaining funding, you should limit your list of possible investors to only those who appear to be suitable. Items like the investor's prior collaborations, reputation, or any shared connections might be used as criteria. Around 30 to 50 names should be on the list, which you may place into a spreadsheet with additional pertinent information for easy reference.

Examine your Networks: Investors want to minimize risk, so if they know you or have heard good things about you, they are more likely to be interested.  Examine your professional networks for potential connections with the investors in question, and carefully determine who would be the best person to make introductions for you.

Make sure your Pitch is Perfect: A sales pitch is your chance to seal the deal once you've gotten an investor's attention. Remember that reparation pays off. Consider the selling factors that will appeal to the specific audience you're targeting. Make sure your pitch starts with a "hook" that leads into a discussion of how your product will address a problem. It's also crucial to have a well-thought-out business strategy that explains how the investor will earn.

Finally, entrepreneurs that take the effort to discover investors who are specifically interested in their financial and operational demands will lay the groundwork for a long and successful association.

Ready to bring your startup to the next level? Apply to MassLight’s next batch. MassLight supplies capital and a dedicated tech team. We take equity in return. Have questions? Refer to our FAQ page.

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