What Are The 7 Different Startup Investor Types?

If you’re raising money for your startup, you might be wondering what are the different investor types available to you. From friends & family, angels, grants, crowdfunding and VC funds, there are 7 alternatives which you can choose from.

What are the different types of investors for startups? How are they different? Which one is best for you? To answer these questions, in this article we’ve listed the 7 different investor types that exist, and which you can reach out to. They are:

1. Bootstrapping

Bootstrapping is a term used for founders that only rely on their own funds and/or the profits generated by their business to fund their growth.

Almost all startups start with bootstrapping. Only later (a few days or a few years) some startups require external capital to fund their growth.

Therefore, founders’ own funds are very often the first and only source of capital to get things off the ground. Whether founders use $20 to buy their startup’s domain name at the outset or $100,000 to build a MVP, as long as all the funds come from their own pockets, they’re bootstrapping.

2. Friends & Family

Friends & family is by default the second source of funding you should be looking for when starting your own business, after bootstrapping.

Indeed, unless you have a strong track record as an entrepreneur, chances are you won’t be able to secure any funding right away from venture capital firms and angel investors alike.

Entrepreneurs often start their own businesses by bootstrapping: they use their own funds to a certain extent. As your own pockets might not be deep enough, friends & family is one of the best option to raise capital at the beginning.

The pros and cons for raising friends & family capital are:

Money is readily available: friends & family will likely not do the same due diligence as other investors might
No or limited legal costs: often, raising capital comes with hefty legal fees as you need to record the terms of the agreement between you and investors. Why would you pay $2,000 to a lawyer if you need to raise $50,000? Friends & family, in comparison, is usually contracted via a personal loan and/or a guarantee between yourself and investors. As such, if any, the cost to draft these contracts is much lower
Flexible terms: as there is a relationship of trust between you and investors, terms can be relatively flexible (no repayment, none or low equity percentage, etc.)
Beware of selling too much equity to investors today. It can seem attractive to sell 20% for $50,000 today for instance. Yet if you sell too much equity early on, investors might ask for the same treatment in the future and you will lose ownership very quickly

For more information on friends and family funding for startups, read our articles below:

3. Government Grants

After going at your inner circle, you may want to consider the different public funding sources available to you.

Surprisingly, very few entrepreneurs actually apply for a government grant. Yet, this is probably the most attractive investor types for a startup. Indeed, some of the public grants are effectively “free money”.

Whether you are applying to a government grant (“free money”) or a loan (e.g. SBA loans for US startups), governments grants are a very attractive source of funding for startups.

Indeed, grants are a form of non-dilutive funding. It is non-dilutive as it does not dilute your equity ownership: you will not be forced to sell equity to receive funding.

Unfortunately, not every business can apply to government-backed grants. They are often designed for companies developing game-changing technological products and services. Also, they come with rather strict conditions: you may have to use the funds only for market research, product development, prototyping, etc.

4. Crowdfunding

Crowdfunding may be a very attractive option to obtain either small or large sums of capital. Many platforms have emerged recently and connect thousands of startups looking for capital with potential retail investors.

There are 2 types of crowdfunding: reward-based and equity-based.

Reward-based crowdfunding

In this form of crowdfunding, investors typically invest a small amount in return for discounts and/or exclusive merchandise. This is especially useful for ecommerce businesses to finance design, sourcing and manufacturing costs before selling the products to consumers.

Pros and cons are:

Funding is non dilutive: you do not sell any equity in return for capital
You acquire your first customers: reward-based crowdfunding investors will invest money in return for your product
It is very competitive, and you might have to invest time and efforts into marketing campaigns

Equity-based crowdfunding

Unlike reward-based crowdfunding, with equity-based crowdfunding you are selling a share of equity to investors in return for their investment. You might raise $100,000 from 200 different investors investing each $500.

This form of equity is less competitive than reward-based. Indeed, your application will likely go through a screening from the platform you are applying to. Equity-based crowdfunding platforms have a list of criteria you need to meet in order to be successfully listed onto their platform.

The main pros and cons of equity-based crowdfunding are:

You will need to sell equity in return for the capital you raise (it is dilutive)
You will go through a screening process (thereby also limiting competition should you succeed)
Because you raise investment from a large number of small investors, you prevent a single shareholder from gaining control over your business

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5. Accelerators & Incubators

Incubators are not strictly organisations that aim to provide funds to startups. They main objective is to guide entrepreneurs throughout the development of their business and give them the tools and advice they need to succeed.

Still, if you are looking for mentoring, guidance and support from fellow entrepreneurs and seasoned investors, be sure to consider applying to a number of incubators. They have their screening process as well. Whilst most will ask you to pitch your business idea, some incubators also accept applications from anyone looking to find a co-founder.

Incubators also are a great source of personal finance: they typically offer a monthly salary for the period during which you will be ‘incubated’ (six months typically). This is quite helpful when you are still in your market research phase and haven’t yet started to incur development costs.

Yet, incubators are highly competitive too. If you are accepted, you will follow a structured time-limited schedule. At the end of each period you will have to pitch your business idea to their panel of investors, allowing you (or not) to go through the next phase.

Here comes the interesting part: successful applicants who make it until the final phase will typically be entitled to an investment up to $150,000 in return for a percentage of your business (usually 10%).

See our articles on the top accelerators and incubators worldwide, read our articles below:

6. Angel Investors

Angel investors are high-net-worth-individuals, who provide financial backing to startups and entrepreneurs in return for a share of the business’ equity.

Angels can have operational experience or not. Ideally you would target angel investors who have experience in your field as they will provide more value than just capital: mentoring and relationships too.

The pros and cons of angel investor funding are:

Angels can provide significant capital early on. Because they are high-net-worth individuals, they act as family & friends, yet can provide a lot of capital for early-stage businesses. It isn’t uncommon to see angel investors investing £50,000 to £250,000 in promising startups. Of course, the more experienced and knowledgeable they are in the field, the more likely they will comfortable investing a big amount of capital.
They will ask for a significant share of equity: because they invest very early, angels are looking for high returns. As such, you might have to sell 10-20% of your equity in return for their investment. By having them at your board of directors with such a significant amount of ownership, you may have to take their decision into consideration in your strategic decisions in the future.

The best way to reach out to angels is to use your own personal network. Through friends of friends, you have better chances to pitch your startup to an angel than sending hundreds of messages on Linkedin.

Want to know how to find angel investors for your startup? Read our articles below:

7. Venture Capital Funds

It is the most cited source of funding for startups as we often read about venture capital firms in the press. Yet, most venture capital firms do not invest often in early-stage startups. Indeed, they often finance Series A+ rounds instead of pre-seed and seed, read our article on the subject here.

Many entrepreneurs make the mistake of seeking venture capital whilst, more often than not, they unfortunately waste precious time they could spend elsewhere.

Unless you are an entrepreneur with track record, venture capital firms will not risk investing big tickets in your business. Instead, VC funds are look for some form of early traction and proven product-market fit.

Therefore, venture capital should be the way to go once you already raised pre-seed and seed funding from other investors. They will be able to fund significant capital, anywhere between $500,000 to $5,000,000 usually.