5 Types of Investors While you might have heard about people starting their businesses by bootstrapping, for most of us, that’s just not possible. Not all of us have disposable income that we can risk by venturing into business.
Fortunately, there are many other ways to finance a business, one of which is with investors’ help. Investors typically generate returns by giving money to startups and earning income through equity or debt investments.
If you need to know what those two are, equity is a type of ownership in the form of company shares. These shares may pay dividends along with capital gains. On the other hand, debt investments are loans extended to other individuals or firms.
But with all that said, what type of investors can help you in your startup? Here are some of them.
5 Types of Investors Angel Investors
Angel investors are individuals with a high net worth willing to share funding for a startup. They typically exchange their contributions with equity for the business, meaning they own a part of the company. Angel investors inject money either in the early stages of the startup or on an ongoing basis. The latter is much more typical when the business model and concept are risky.
Usually, angel investors only offer capital from their extra income, and this investment can’t be seen on their profiles. Some angel investors sell their shares once the company is established and stable. They’re called “angels” because they are willing to help out and disappear once your business is going well.
Venture capitalists invest millions in a company by securing a share through equity. The investment is predicated on the idea that the company will aggressively expand, and the value of shares will eventually increase, giving them an excellent return on investment. Your business needs to have a solid business plan, and the entrepreneur needs to have experience in the industry. However, they also invest in startups from time to time.
One thing you should know about venture capitalists is that they will require partial ownership of the business. Because of this, they will have a say in different aspects of the firm.
That might sound bad, but not really, because with their expertise, you can learn and adapt some of their managerial expertise. They will even give you different properties for your business, like equipment or office spaces.
5 Types of Investors While you may not consider your friends and family to be one of your investors, it’s a very common approach to business funding. Personal investors have the biggest piece of the pie in overall investments.
It’s the best-suited approach to creating funds for a business project to take off the ground. However, because they tend to be loyal, they have a higher affinity to stay long-term in the business, which means they will have equity for a long time or until they sell it back to you.
Also, since they are your friends and family, they tend to mix in personal matters within the business. Even though they are the most common approach, many startup entrepreneurs prefer to avoid personal investors. If you are looking for investors among your family and friends, it would be better to form a contract with them.
You could instead take out a loan from them or have them finance a loan for you. There are many options for you in the market nowadays, no matter where your business is located. So whether you’re looking for California personal loans or Installment loans, you should be able to find one that suits you. It will prevent you from having to give out equity and mix in personal matters in your business.
P2P lending is a form of financing where you take out a loan from an investor without needing an intermediary like a bank. There are a lot of websites where you can create a profile, make your pitch, and wait for an investor who is interested in funding your business project. However, the requirements for the loan also vary by the investors, so it’s common for them to ask you to raise your credit score before giving you the loan.
Institutional investors are organizations that invest others’ money. Examples are hedge funds, pension funds, exchange-traded funds, etc. Since they are handling a huge amount of money from other investors, they can purchase huge assets, usually shares. That said, if your business meets these institutional investors’ requirements, you’re set for a long time.
Each type of investor has its agenda, requirements, and desired results. If you don’t think you’ll be able to bootstrap your way into a new business, then maybe an investor might be able to help you with that. Just make sure that you’re picking the right one. Good luck!