Step 3: Find out which investor type is a better fit for your situation
There are some stage-agnostic firms, but usually, they target startups at a specific stage of development and provide capital at particular startup funding rounds.
Also, consider the amount of investment you are looking to raise and the way you are planning to use it.
Angel Investors - individuals, informal investors who provide funding for startups in exchange for a stake in ownership in the company.
Investing their own money Angel Investors are quite flexible in making investment decisions in terms of funding rounds, industries, etc. But normally they invest at the early stages in sectors related to their background. They are good at sharing their experience and network in the industry.
To reduce risks, diversify an investment portfolio, get access to deal flow and for many other reasons, individual Angel Investors get together and form Angel Groups to evaluate and co-invest in startups.
Super Angel Investors
Super Angel Investors are a relatively new phenomenon in the venture industry filling the gap between Angel Investors and Venture Capital Investors.
Super Angels combine characteristics of Angel Investors and Venture Capital Investors: they invest early like Angel Investors but just as VCs they are usually professional investors and raise money for the investments.
Super Angels make a larger number of investments and provide larger check sizes than traditional Angel Investors. In addition to funding, they provide strategic direction, instructions, and other support.
Venture Capital Investors
Venture Capital firms manage pools of capital raised by various investors, such as wealthy individuals, corporations, pension funds, investment banks, etc.
Venture Capital Investors tend to focus on emerging up-and-coming enterprises with near-term exit opportunities seeking substantial funding.
Venture capital funding can be provided to companies and entrepreneurs at different stages of their development.
- Early-Stage Venture Capital Investors
Provide funding at early stages taking high product-market fit and market timing risks in the expectation of higher return on investment. In comparison to Late-Stage VCs, they provide relatively small amounts of money.
Late-Stage Venture Capital Investors
Prefer to avoid early-stage risks and provide a second or third round of funding at market execution stages.
They are usually less industry-specific than Early-Stage VCs.
Family Offices - privately held advisory firms providing wealth and investment management for wealthy families.
Family Offices can be single-family offices or multi-family offices where several families pool resources to set up a joint office and share costs.
As opposed to traditional investment firms, many family offices do not have a strict investment mandate and/or investment committee. They are more flexible in making investment decisions. However, they typically invest only in later stage venture deals.
Check sizes are typically smaller than the ones offered by VCs but larger than offered by Angel Investors.
Private Equity Firms
Private Equity Firms - investment management companies providing capital investment to companies that are not publicly traded. Just as VCs, Private Equity Firms raise money from institutional investors such as pension funds, high net-worth individuals, corporations, investment banks, etc. However, when investing in private equity funds, institutional investors expect less risk than in the case of venture capital funds.
Private Equity Firms focus on larger, more established companies than VCs do. Such companies already generate substantial revenue but seek additional funding to grow and expand.
Private Equity Firms typically provide operational support to the invested company management to help improve and grow the business, increase revenue, and, consequently, generate higher returns.
In general, Private Equity Firms are much less industry-specific and invest much more money in a single company than VCs. They typically acquire a controlling interest in the target company.
Apart from mentorship and fixed-term training programs, startup accelerators usually provide a pre-seed/seed investment in exchange for equity. They provide relatively small capital sufficient for pre-seed/seed-stage companies to tide over until the next funding rounds.
Accelerators tend to specialize in specific industry sectors and startups go through a selection process to be enrolled. Accelerators invest under the same terms into a cohort of startups and provide them with the same support.
Some Accelerators are sponsored by large corporations or by governments. There are also Accelerators backed by venture capitalists.
Corporate venture capital is a capital provided by large corporations for external startup companies in exchange for equity stakes or through joint venture agreements.
Corporate Investors may also provide the investee startup with loan capital as well as management and industry expertise, deep insight into the market, and strategic advice.
The main objective of corporate venture capital is to gain excess to new disruptive technologies in their field and potentially get new resources and enter new markets. That explains why the main distinction between Corporate Investors and traditional VCs is that the former pursue not only financial but also strategic goals.
Corporate venture capital funding can be provided to startups during various stages of their development - from pre-seed to the most advanced stages.