By now, you will probably know what an investor is: someone who will fund your business in exchange for shares. By placing their money into your enterprise, they hope to get substantial returns on their investment as you generate profit. The bonus is that you get the financial support you need to achieve your goals and become successful.
Due to the funding that investors provide, it’s advantageous to have one backing your business. However, you want to work with an investor that is suitable for your needs and preferences. Not all investors are the same and knowing how they vary will help you pinpoint one that works effectively with you.
In this guide, we have outlined the types of investors you may come across in your mission to secure funding. Each possesses their own set of goals and ways of working, meaning some types may align with your requirements best. Understanding the differences will also help you to tailor your pitches, increasing your chances of success.
Friends and family
Although a more informal investment source, approaching friends, family and other connections can help to culminate a decent amount of funding to get your idea off the ground. This is most entrepreneurs’ first point of funding when starting their business.
The amount you can get will depend on how much your friends and family are willing to give you and how many of them you can get on board.
If you approach personal connections for investment, it is still worth investing in a pitch deck and the right documents that outlines your agreement and is signed by both parties. Although these are people you are close to and may be happy to lend you the money in the early stages, there may come a time that they want their investment back. This can create conflict and damage relationships, as well as potentially amounting to legal action. Having an agreement in place will manage expectations and quell any tension later down the line if things go wrong.
Angel investor
An angel investor is an individual with a high net worth, looking to place some of their funds into a business in exchange for equity that ultimately returns on their investment. They usually act alone or as part of a syndicate. Individual angels tend to invest anything from £10,000 to £150,000 into one venture, while a syndicate can raise amounts of several million.
There are a few ways to identify an angel investor. There are specific angel investment networks, such as the UK Angel Investment Network, which use their online platform to match investors and entrepreneurs for deal-flow. You may also find them through networking or an introduction from shared contacts. However, you may find you have to pitch to many angels before finding one who wants to back you.
One of the main benefits of using an angel investor is that they often have a wealth of industry experience and contacts. This means you can access valuable advice for the running of your business alongside their investment. It also means they take a more hands-on approach, which may or may not be something you want.
The relationship you have with the angel will vary from individual to individual, so you will need to hold discussions to gauge what both sides want from the deal before committing, including an exit plan. If you can find an angel that suits your needs, it can lead to a mutually beneficial partnership for your venture.
Venture capitalist
Venture capital investment is associated with early-stage, potentially high-risk enterprises that offer a high level of promise. A VC firm will pool investment from multiple sources to place into a business. As a result, you could receive a larger sum of funding, beyond that you might obtain through angel investment.
Although venture capitalists are open to risk, which will be welcome news to those who have struggled to secure funding elsewhere, it comes at the pay-off of a high expected return. VC firms will typically expect at least 25% return on their investment per year, so you need to showcase the capability for your venture to succeed. You will also have a limited timeframe to achieve returns, with most venture capitalists looking to exit within five to eight years.
If you go down the VC route, you will also need to be open to hands-on advice for your business. This ensures you meet the expected levels of return, though it can provide helpful support in optimising your operations, identifying opportunities, and building networks.
It’s also worth noting it can be a challenge to secure venture capital. You need to convince investors that you have a strong proposition with the ability to make it a reality, so you will need to craft a pitch that showcases this to stand a chance.
Crowdfunding
Another, more form of investment is crowdfunding. With crowdfunding, members of the public give money to a business to help it achieve its goals. They get different things for their money, such as return on their investment, promised repayment later down the line, exclusive offers, free products, or just to donate to a good cause. Crowdfunding can also see people offer money to a business in exchange for equity, which could provide profit in the future.
Crowdfunding can be an excellent alternative source of investment, but there are challenges. Firstly, most people will only offer small amounts each, so you need to get an adequate number of people to support you to generate a sizeable pot of money.
Secondly, you need to give people a reason to fund you. Crowdfunding tends to work best for ventures that serve a local community or specific niche, provide a service that people are excited about or have a charitable cause that engages people. You need to be able to play on this to have any success.
You also need to make sure your crowdfunding proposal is visible to target more people, by having a well thought out marketing campaign including social media. Remember to keep this visibility going as your funding campaign runs, including providing updates or other incentives to get people involved. The main challenge lies in creating and maintaining a high enough level of interest in your business to keep investment coming in – but those who do it well can experience excellent support. The key to a crowdfunding campaign is having a third of your target investment raised in advance.
Debt investors
Although they focus on repayment rather than return on investment, finance from banks and other lenders is often called ‘debt’. If you don’t want to pursue equity or struggle to get funding from equity sources, you might consider debt finance instead.
Debt finance covers many funding types: bank loans, cash flow options (such as trade and invoice finance), leasing, alternative loans and mortgages. Depending on the type, it is possible to unlock sums of capital for your business. You will agree to a payment plan under which you repay the borrowed money, plus interest, over a set timeframe. You do not need to give up equity in your business or obtain a specific profit level to give as ROI.
Debt options can also work in conjunction with investment, especially if you are trying to increase your finances. In some scenarios, it may make sense to pursue a debt solution, such as using a mortgage to buy a premise or using cash flow management to release capital stuck in your operations. If you are looking to blend equity and debt, it’s essential to check your various contracts to ensure there’s no conflict and that any investor you work with is happy for you to pursue other finance.
Get advice
An investor can be a great business asset, but it’s vital to remember what you need to ensure anyone you bring on board aligns with those requirements. Understanding the various types of investors in the market will help you to find one that suits you with complete comprehension of what they want from your business. This can lead to a fruitful relationship, where all parties achieve their objectives and benefit financially.
If you need advice in identifying the correct type of investor for your business, we can help. Our team of advisors has expertise across several funding types, so we can take you through the options available and serve your unique challenges best. We can also introduce you to potential investors and lenders to kickstart your journey.