The startups’ various financial needs are met through a whole series of investment types owned by the founders to transform the early business into a stable and profitable company. Each has advantages and disadvantages and can apply at a specific stage of startup development. Thus there is a different list of types of investors for startups.
Investors for startups – the angel investor
The angel investor is also interested in profit, just like other investors. However, they have been called “angels” because they are exposed to higher risks and offer lax financing terms, compared to strict standards and regular payment of a loan requested, for example, by banks.
Investors for startups – venture capital
It is the next stage of investment financing for startups, and it is the stage or type of impersonal types of investors, but still means bearing a high degree of risk on the part of the funder. This is related to the idea of the “venture” (initially “the adventure,” but in the business, the “speculative venture”). As an individual, unlike the owner investor, the venture capitalist makes a financial contribution from third parties, not from his cash.
As a corporation, venture capital can mean different specialized firms’ specialized operations to more conservative firms, such as mutual funds or large firms.
Investors for startups – banks
It is the traditional way of financing a business. However, after the internet boom and the post-2007 crisis, banks usually offer stricter financing terms. In Europe, for example, a small company with sales of several tens of thousands of euros per year can receive credit offers of approximately 3,000 euros from banks. This size arrangement shows that for startups, bank loans can only work to cover operating expenses, besides, if the startup is making a profit or has another source of financing.
Crowdfunding and Lending
Crowdfunding and P2P (peer-to-peer lending) is one of the newest financial instruments highlighting the fourth type of investor type for startups. The difference between the first and the second is that, in commercial terms, crowdfunding involves transferring a portion of the business. In contrast, P2P lending consists of returning the interest money, as is the case in banks.
Crowdfunding is best known for its various cultural and charitable projects funded by it. The success of crowdfunding depends on the success of the campaign, which is usually conducted online. However, through crowdfunding, successful results were created for startups such as the Oculus Rift virtual reality headset and the Pebble E-paper Smartwatch. The smartwatch with a screen that received an investment of more than $ 1.3 million.
Mergers and acquisitions: investment funds, large corporations, stock offerings
These are more complex tools related to the post-finance stages. It involves large-scale operations. It should be noted that most specialists consider that in the course of every business, there are at least five stages of financing.
Ultimately, after the business matures and the required amount of money is obtained, the necessary funding in startups depends on the type of needs and is generally a mixture of investors’ types for the startups mentioned above. A rigorous business plan and risk assessment also clarify the formula that companies should obtain regarding the type of investment.