Common Types of Startup Investors: Who Are They and How Are They Different?

By: Alex McElfish July 21, 2022

Common Types of Startup Investors: Who Are They and How Are They Different?

The wide world of investing can be complicated—especially if you’re new to it. From the different investments one can make to the types of start-up investors, there’s a lot to learn. 

In this article, however, we will be focusing on the latter; that is, the different types of start-up investors and how they differ from one another. Knowing about these differences is important because, regardless of whether you need investors or would like to be one, knowing who to seek out to get things started can be a massive benefit. 

Read on to learn more about the most common types of start investors, who they are, and how they are different. 

#1: Founders/Cofounders

The most common type of start-up investors you’ll find are founders and cofounders. These are the people who own the project in question and who are funding it using their own capital. 

Generally, this type of investment happens during the early part of a project, but many founders also like to continue pouring funds in throughout the fledgling stages to give their startup a solid foundation. 

#2: Friends and Family

When most people begin to seek out investors, this is where they go first. They will start by asking friends and family members to invest in their project and offer them a spot on the ground floor. 

For some start-up entrepreneurs, this step will be enough. They will have enough connections to fund their project until it starts generating its own funding and won’t have any need to seek out additional capital. 

For most people, however, their friends and family who become investors in their project will only be the first step. From here, they will move into seeking investments from outside sources such as angel investors or venture capitalists. 

#3: Angel Investors

As mentioned in the previous section, angel investors often come after the founding members have contributed their own equity to the project and sought out help from friends and family members. 

These types of investors or investment groups provide capital to small startups in exchange for ownership equity or various forms of convertible debt. They are known as angel investors because they provide startup funding at a point when most funders are not prepared to do the same. By doing this, they enable a startup enough funding to begin operations when said business would otherwise not be able to get off the ground. 

#4: Venture Capital

Venture capital is a form of capital invested into a project that has been determined to have high risk involved. Typically, this is characterized by new or expanding businesses. 

Most groups and organizations that provide venture capital do so only with startups that have demonstrated high growth or potential for high growth. To be eligible for venture capital, you are expected to have well-developed business plans, pre-established operating procedures, and many other preparation-oriented papers. 

According to the Harvard Business Review, in exchange for funding the first few years of a company’s existence, most venture capitalists will expect a return on investment ten times the original fund amount over five years. 

Final Thoughts

If you or someone you know is considering procuring funding for their start-up, we hope our article has helped. Additionally, we are here to help if you need assistance raising capital. Otherwise, check out our blog for more information on funding your start-up!

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