Business Angels, VC funds, accelerators, grants … There are so many types of investors on the market that it’s easy to get lost. It’s crucial to choose the funding that fits your stage to launch and grow your startup.
If you're a first-time founder or just starting your journey to raise that first round — here's a breakdown of all the types of early-stage startup investors.
Friends, Family, and Fools (FFF) Investors
FFF investors are usually people who give your startup money not because they believe in your idea, but because they like you and want to help you.
Some outsiders give the side eye to founders with deep trust-funds to chase their dreams. But this network can really be anyone who believes in you.
If you're launching a startup in a niche where you have years of experience and a solid network of contacts AND a stellar reputation — those folks might be first in line to fund your idea.
Because they know you understand the problems and opportunities deeply. Here's an example from Ashanti, founder of Ternwheel.
Angel Investors
Individuals that invest their capital in the early stages of startup development. Usually, they invest based on the domain they have expertise in or their geographical presence.
Full-time angels are fully dedicated to investing in smaller companies while part-time angels are still working, but already want to diversify their portfolio. To become a business angel an investor needs to be accredited by the SEC in the USA.
Founders who have successful grown and sold their startup are fantastic angel investors — especially to first-time founders in the same industry.
Their experience can help you not only with cash but also to avoid mistakes and grow faster. Not to mention the exposure they bring to your new idea to boost early traction.
Business Angel Syndicates
Syndicates are groups of business angels who unite to invest together. Being a part of the syndicate helps people diversify their portfolios and invest in the domains they don’t know much about.
Some syndicates have lead investors with their capital and followed by people who simply earned a lot of money and want to invest deal by deal.
If there is a lead investor, they get more returns than other angels in the syndicate by receiving a Carry (carried interest) — the percentage of profits paid to the lead is typically 15-20%.
So getting just one or two angel investors interested in your product early can open the door to more if they're part of a formal or informal syndicate (if there's one thing investors love, it's being in a network of other investors).
Venture Capital Funds & MicroVCs
VC Funds and Micro VCs differ only in the amount of money they manage and the number of staff. A lot of people think about venture funds as an organization of white collars and black ties, but it’s not right.
A venture fund stands for the number of funds invested by contributors (general partners and limited partners) and managed by a venture capital firm.
Venture funds use the borrowed capital of investors. Micro VCs can deal with up to $15M and are operated for 10 years by 2-3 business angels. VC funds are operated by more staff with a more complex hierarchy.
Each fund has several cycles of its life. Yes, it’s different from a syndicate, because it has a lifetime, generally around 10 years, that helps to fix the prices.
- Stage 1 — fundraising stage before the VC is started, when general partners gather funds from limited partners.
- Stage 2 — investing, which usually takes from 1 to 3 years from the 10-year lifetime. It’s a period when the fund is looking for great deals to invest.
- Stage 3 — helping portfolio companies to grow.
- Stage 4 — exiting, when funds help to find the best exit options.
Venture funds have staff working to help the startups they choose, and this staff needs a salary. That’s why venture funds take management fees for operational expenses.
Usually, such a fee is 2% per year. So if you gathered a 10-year fund for $100mln then $20mln will be taken by the fund for their expenses.
Corporate Venture Funds (CVCs)
Venture funds with no lifespan that usually invest strategically in technology. There are no investors and there is no need to fixate on profitability.
Simply put, it’s like Google creating its fund as a separate private company.
Accelerators and Incubators
Organizations that help startups with knowledge and expertise. They are basically educational programs based on 3-months cohorts.
If an accelerator has chosen a startup, it will provide it 2-3 months of assistance for some sum of money in exchange for equity.
Venture Studios aka Startup Studios
Classic Venture Studios are companies that develop startups. They can specialize in one or several categories. Studios are more hands-on than other investors.
Different from accelerators, venture studios help startups their whole lifetime dive super-deeply into the operational processes.
Venture studios fall into 2 categories, or mix these together:
- Studios that develop their own products but look for a CEO to take the lead during the first traction. In such a scenario, studios give the new founder around 20% of equity and help them to grow the startup.
- Studios that develop founders’ products and help these founders with development, launch, growth, support, marketing, and so on for a part of the equity. This approach is similar to what we provide in Paralect.
Alternative startup funding sources
Bootstrapping
A process by which an entrepreneur starts a self-sustaining business, markets it, and grows the business by using limited resources or money.
It’s an ideal way to grow your startup in the early stages with your own finances and with no shared equity. Here's one fabulous bootstrapper story from Igor's Do it in Public show — Stefan's all in on calm, bootstrapped startups!
Crowdfunding
A way to gather collective investments as donations. Usually, the amount of money is not so big, but if the founder manages to attract a lot of people in the campaign, the investment can become significant.
Grants
Donations on a gratuitous basis to usually socially significant projects. The social significance is the most important here because without it the project generally can’t apply for a grant.
TLDR
There are a lot of ways to win in the startup world — and even though funding has slowed down in general since the wild ZIRP times a few years ago, new success stories are being written every day.
So remember, it's never a bad time to make valuable connections with leaders in your industry — they could be your first FFF investors in the future.
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