Finding the right investors is crucial for startup founders, entrepreneurs, and business owners looking to raise equity investment to grow their business. Different businesses need different types of investors depending on their stage of development (what investors call traction), and it’s important to find the investors who can help you ensure your business reaches its full potential. Our friends at Focused For Business, who run a Funding Accelerator that helps startups prepare for investment, find the right investors and close a funding round in just 90 days, have provided this guide which introduces the different types of investors, their characteristics, pros and cons, and practical ways to connect with them. Let’s dive into the world of business investment and find out how to secure the funding you need.
Different Types of Investors
Friends and Family
Friends and family investors are individuals within your personal network who are willing to invest in your business. They typically invest early in the business’s lifecycle, often at the seed stage, making investments from a few hundred to several thousand pounds, depending on their financial capacity and trust in your venture. As a general rule, they are backing you (as the startup founder) rather than the business.
Pros:
- Trust and belief in your vision
- Flexible terms and conditions
- Faster decision-making process
Cons:
- Potential strain on personal relationships
- Limited investment amounts
- Lack of professional guidance
Accelerators
Accelerators are programs that provide startups with mentorship, resources, and funding. Sometimes these programmes are accessed by paying a programme fee or sometimes in exchange for equity. They usually run for a fixed term and culminate in a demo day where startups pitch to investors. Investments typically range from £10,000 to £50,000, and accelerators usually focus on supporting early-stage startups.
Pros:
- Access to mentorship and resources
- Network of investors and industry experts
- Structured program to accelerate growth
Cons:
- Equity dilution
- Fixed program duration
- Competitive selection process
Angel Investors
Angel investors are high-net-worth individuals who provide capital for startups in exchange for equity. They often invest their own money and bring valuable experience and networks to the table. Investments usually range from £10,000 to £500,000, and angel investors often invest in early-stage startups.
Pros:
- Significant capital infusion
- Valuable mentorship and industry connections
- Flexibility in investment terms
Cons:
- Equity dilution
- Potential for conflicting interests
- Limited scalability of investment amounts
Family Offices
Family offices manage the investments of wealthy families. They can provide substantial capital and often invest in a diverse range of assets, including startups. Investments range from £500,000 to several million pounds, and family offices invest in various stages, from seed to growth stages.
Pros:
- Large capital availability
- Long-term investment horizon
- Potential for multiple rounds of funding
Cons:
- Stringent due diligence process
- Potential for high equity demands
- Focus on risk management may limit investment opportunities
Venture Capitalists (VCs)
Venture capitalists are professional investors who manage pooled funds from multiple sources to invest in high-growth startups. They provide significant capital and strategic support. Investments typically range from £1 million to £100 million, and VCs usually invest in growth-stage companies with proven traction.
Pros:
- Large capital infusion
- Strategic guidance and industry expertise
- Access to extensive networks
Cons:
- High equity demands
- Intense scrutiny and due diligence
- Pressure for rapid growth and high returns
Private Equity Firms
Private equity firms invest in established companies, often with the intention of restructuring and scaling them. They differ from VCs in their focus on mature businesses. Investments range from £10 million to several hundred million pounds, targeting later-stage companies with stable revenue.
Pros:
- Large capital investments
- Strategic operational improvements
- Long-term partnership
Cons:
- High equity demands
- Potential loss of control
- Focus on profitability and exit strategies
Crowdfunding
Crowdfunding involves raising small amounts of money from a large number of people via online platforms. It can be equity-based, reward-based, or donation-based. Investments can range from a few hundred to several thousand pounds, and crowdfunding is suitable for various stages of business development.
Pros:
- Access to a wide audience
- Crowdfunding investors often also become strong brand ambassadors
- Marketing and validation of business idea
- Flexible investment amounts
Cons:
- Time-consuming campaign management
- Potential for low funding success rate
- Need for strong marketing strategy
Corporate Investors
Corporate investors are established companies that invest in startups for strategic reasons, such as gaining access to new technologies or markets. Examples include Google Ventures and Intel Capital. Investments can range from £100,000 to several million pounds, depending on the strategic alignment and stage of the startup.
Pros:
- Strategic alignment and support
- Access to corporate resources and expertise
- Potential for strategic partnerships
Cons:
- Potential conflicts of interest
- Strict due diligence and compliance requirements
- Focus on strategic rather than financial returns
Preparing Your Business for Investment
Before you start fundraising, ensure your business is investment-ready. You will need:
- Solid Business Plan: Develop a comprehensive business plan outlining your vision, mission, and strategy. Most investors are happy to see a business plan in a pitch deck rather than a long Word document.
- Financial Forecast: Ensure good financial health and create well-thought-out financial projections. Consider working with an accounting firm like Standard Ledger (hey, that’s us!), which understands the startup journey inside out. We can help you craft financial forecasts that not only impress investors but actually make sense in the real world.
- Strong Team: Assemble a team with relevant skills and experience.
- Market Research: Conduct thorough market research and competitive analysis.
- Intellectual Property: Protect any IP and secure trademarks.
- Business Valuation: Develop a credible valuation for your business. Did you know we offer expert services for all your valuation needs? Whether it’s a startup valuation for capital raising or preparing to exit, an HMRC-approved EMI valuation for your incentive scheme, or a growth share valuation to motivate your team, we’ve got you covered!
Finding Investors – here’s where to start looking
Networking and building relationships with investors are the key to success, but everyone has to start somewhere. Here’s some practical suggestions for finding investors:
- Industry Events and Conferences: Attend events to meet potential investors.
- Startup Incubators/Accelerators: Leverage these programmes for investor connections.
- Professional Networks/LinkedIn: Use LinkedIn to facilitate warm introductions.
- Investor Networking/Pitch Events: Participate in events designed for startups to pitch to investors.
- Online Tools: Use platforms like ShipShape and Scribe Labs to find investors.
- Crowdfunding Platforms: Use platforms like Kickstarter, Crowdcube, and Republic Europe.
- Existing Angel Investors: Use this interactive map to find angel investor networks in your area.
- Customers and Suppliers: Consider if they may want to invest.
- Accountants and Financial Advisors: Utilise their networks to find potential investors.
We’d recommend building connections with investors ahead of officially opening your fundraising round. No one likes being asked for money the very first time you meet them so working on building rapport and trust first.
Pitching to Investors
When pitching to investors, you need to be prepared. Most investors will expect you to have the following documents:
- Executive Summary: A one-page short introduction to hook investors.
- Pitch Deck: A compelling narrative explaining your vision for the business.
- Financial Forecasts: 3 or 5 year projections, including a P&L, Balance Sheet & Cash Flow, but also stating your assumptions and plans that show how the business grows month by month, year by year.
- Valuation Justification: A rationale for your business’s valuation.
Our friends at Focused For Business run a Funding Accelerator programme to help you prepare for investment, find the right investors and build the evidence you will need to negotiate and close the funding round in just 90 days.
Finding the right investors is crucial – not just for securing the investment you need, but also to surround yourself with the right support, skills and contacts to grow your business. By understanding the different types of investors and preparing your business thoroughly, you can increase your chances of securing the necessary funding. But it’s networking and relationship-building that are key to connecting with potential investors in a way that ultimately secures you the investment you need..
If you are looking for further support in preparing for investment, a good place to start is at one of Focused For Business’s free Funding Strategy Workshops.
