Startup investors: the complete guide

Startups, by definition, are meant to grow. The scaling-up process requires sums that the average founder just might not have in their wallet. This is where startup investors step in, by providing liquidity in return for equity, or a credit that can turn into equity (convertible loan).

Angel investors, VCs, and incubators are all viable sources of financing. But how do they differ from one another? While the specifics may change depending on local regulations, some distinctions hold true, no matter where the startup or investors are based.

While there is nothing like a hierarchy of investors, some sources of financing will be more suitable for startups at a given stage of development. The progression isn’t linear, nor will it look the same for every startup. Some companies might skip a few steps, while others may take the same kind of funding multiple times.

For the majority of founders, the very first source of capital is usually still friends and family. Having exhausted this (normally modest) avenue, the options can become more complex.

Angling for angels

After successfully raising capital from rich uncle Norman, the next rung on the complexity ladder is to win over someone you are not related to. At this stage, the startup is often no more than an embryonic entity. Convincing someone to part with their savings, without being tied by bonds of blood or friendship, is a tougher proposition.

Angel investors are usually high-net-worth individuals who provide capital for startups out of their own pocket. Angels prefer to put their money to use in sectors that they know, so they might also be able to provide advice or access to networks in addition to financing. Or they may not – preferring to provide just the cash, and leaving the rest to the founders. Much depends on the inclination of the individual investor.

The relationship between founders and angel investors is, by necessity, a personal one. Both founder and investor will have skin in the game, and both will have a vision for the fledgling company. Matching with someone who clicks well with you is just as important as the amount of financing they are willing to provide.

Incubators and accelerators

Incubators and accelerators will ideally nurture your startup until it is ready to leave the nest. As well as potential funding, these hubs usually also offer non-monetary perks such as intensive programmes, mentoring, access to industry networks, and the use of co-working spaces and other facilities.

Some incubators and accelerators support a broad range of different types of companies, while others, like ours at the ProVeg Incubator, focus on specific sectors. The entry criteria vary from programme to programme and selection processes can be very competitive.

Startup investors invest in omni
Vegan pet food brand Omni raised £1.1 million from startup investors

The main differences between incubators and accelerators typically lie in the length of the programmes that they offer, whether they are for or non-profit, and the stage of startups they choose to focus on. That said, the lines between the two are becoming increasingly blurred.

Both incubators and accelerators offer good opportunities to help founders grow and improve their businesses. Keep in mind that some will take equity in return for the capital and services that they provide. Our advice would be to research your options thoroughly, and apply for the ones that offer the right combination of funding, support, and industry expertise for you and your company.

Venture capital funding

Venture capitalists (VCs) are the next broad category. They are financial firms, staffed by professionals who scout early-stage companies with a high growth potential. VC firms usually come into play at a later stage of a startup’s life.

They differ from angel investors in that, rather than using their own money, they use other people’s money to provide capital. VCs are entrusted with funding from investors who are interested in high-risk, high-reward opportunities — like your startup.

Venture capital firms can provide access to significant amounts of liquidity. This will come with demands for greater accountability, so expect a different level of scrutiny from them. Before providing any cash, they will want to know every detail of your startup. They will have a say in key decisions.

At the same time, VCs don’t have a stake in your startup by definition. Even if you are doing poorly, they might be doing fine. As long as their basket of investments as a whole is performing well, their concern will be relative.

Startup investors: better nature raise via crowdfunding
Better Natures raised £1.6 million in two days with a crowdfunding campaign

The crowdfunding avenue

Ever heard of Kickstarter? That’s crowdfunding. Raising capital from the public directly is generally a big no-no for a private company in most jurisdictions – and with good reason. Retail investors generally don’t have the skills required to make a call on whether a startup is a sound investment or not.

The same might be said of all other investors. The general public, though, tends to have less of a humour for when things go sideways – and their savings are lost. So how do platforms like Kickstarter exist within the boundaries of the law?

Supporters of crowdfunding campaigns don’t get equity in return for their backing. They will generally receive exclusive goodies, and additional perks from the startup and its founders instead. However, they are not entitled to voting rights or a share of the startup’s profits. The members of the public who back a crowdfunding campaign will do so because they like the idea.

Cash for… paperwork?

Government-sponsored startup funds are another avenue to look into. While they might be more or less competitive, and transparent, depending on the jurisdiction, they generally come with fewer strings attached than other sources of capital.

Rather than seeking a share of the startup’s future profits, government-owned investors pursue broader goals. These may include increasing employment, or furthering innovation.

As downsides, the amounts on offer tend to be smaller than other funding sources. They also generally take longer to be disbursed. The application forms required to qualify for such funds might be rather more structured than similar applications required by private entities. The support of outside professionals might therefore be required in order to complete them without errors.

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