What Kind of Startup Investor is Right for Your Company?
While not all startups have to raise money to scale, most startups will need some investor money to grow. When it’s time to fundraise, there are many potential sources of funding for your startup. Today’s blog post will discuss different kinds of startup investor and explore other ways startups find the financial support they need to be successful.
What is an Angel Investor?
Angel investors are usually individuals, or groups of individuals, who invest their own money into early stage companies. “Seed funding” from angel investors is usually one of the first sources of financing a startup company will pursue (generally after raising initial funds from the founders and their friends and family). This seed funding is generally used to support the company until it can start to generate cash on its own or until it is ready for more substantial investment. This is also generally the financing stage where startup companies begin perfecting their investment pitch.
According to Alliance of Angels—one of the more prominent angel investor networks in Seattle—a typical amount for an initial seed funding investment by an angel investor is between $25,000 and $100,000. In 2015, angels invested a total of $24.6 billion.
What is Venture Capital funding?
Venture capital funding comes from investment funds that typically pool money from several investors and are set up to invest in early stage companies. Limited partners (often including pension funds, banks, and wealthy individuals) invest money into these VC funds, and that money is then invested in startups by the fund’s general partners. VC firms are typically made up of the partners who lead the investments, associates who help the partners, and analysts who research the investments.
As compared to angel investors, VCs generally invest more money and at a later round. But, because VCs are larger, they tend to do fewer deals than angels. In 2016, more than $69.1 billion was invested across 7,751 companies. Examples of VCs in the Seattle area include Madrona, Maveron, Founders Co-op, and Voyager.
In 2016, angel investors invested $6.6B in just over 4,000 deals, and VCs invested $69.1B in just over 8,000 deals. Below is a chart comparing the median and average round sizes for VCs and angels:
Not every early-stage investor falls into one of these two buckets (angel investor or VC). In between angel investors and VCs are a few additional subsets of investors: super angels and micro-VCs.
Super angels invest early, like angels, but tend to invest more money than traditional angels. Because they are typically individuals, and not larger firms, the process for fundraising with super angels can be faster and less demanding than with larger VCs.
Micro-VCs are what they sound like: smaller VC funds. They typically invest earlier than VCs and in smaller amounts. Generally, their investments are between $25,000-$500,000. Another definition of a micro-VC is a firm that has not raised a fund over $100 million and have a primary focus on pre-seed or seed rounds.
Not quite VCs and not quite angels: other models for funding and support
Accelerators support early-stage, growth-driven companies through education, mentorship, and financing. A startup will enter the accelerator for a fixed period of time, and as part of a cohort or class of companies. Usually the accelerator provides an initial investment to the startup, around $10,000-$40,000. The accelerator also provides mentorship and rapid, immersive learning over a period of a few months. Usually, the startup “graduates” from the accelerator by showing off their accomplishments on “demo day.” Famous accelerator graduates include AirBnB, Dropbox, and Stripe. Y Combinator and TechStars were two early, prominent accelerators. TechStars began in Boulder, Colorado, but now has branches all over, including in Seattle, while Y Combinator is only in Silicon Valley. In recent years, 9Mile Labs, another Seattle tech accelerator, has gained quite a bit of momentum.
Incubators, in contrast, do not typically invest money in companies. Instead, they provide startups with affordable spaces to work, access to resources (like printers, Wi-Fi, and conference rooms), and the opportunity for networking and professional events. Often the distinction between incubators and accelerators is blurred, as accelerators also provide similar resources to startups. But a key feature of the incubator is that is does not provide funding to startups. Examples in Seattle are SURF Incubator and Impact HUB.
Startup studios are another model of startup support. The studio will develop and test ideas in the market. Then, the most promising ideas will be handed over to outside talent with experience so that they can grow the business. The ultimate goal is for the idea to develop into an independent business funded by VCs. Example of studios are Pioneer Square Labs in Seattle, and Idealab in southern California.
Equity crowdfunding allows people to buy equity in a company using an online crowdfunding platform. Think Kickstarter, but instead of just donating or receiving a t-shirt, investors get shares in the company. There are many reasons to be cautious of this seemingly good idea. First, many crowdfunding sites fail to comply with regulations, driving down trust in this funding model. Second, if a startup’s initial funding is through equity crowdfunding, VCs and other accredited investors may be reluctant to invest in later rounds because they worry that the initial fundraise through crowdfunding did not comply with securities regulations, which could lead to problems down the road. Third, given how new the model is (the JOBS Act that authorized crowdfunding was only passed in 2012), there is uncertainty around how this financing model will impact the company’s long-term growth. Fourth, it can be expensive to pursue crowdfunding, given the heightened risks and legal issues surrounding this new model. Some estimate that it can cost $140,000-$250,000 to raise $1M in crowdfunding. For these reasons (and others), many doubt the feasibility of getting funding through the crowd.
There are many options for your startup to get the funding or support it needs, and the best match will depend on your company’s funding needs, where it is in its lifecycle, and your network and relationships.
If you’d like to learn more about startup financing, finding the right startup investor, and navigating the various issues while raising funds for your startup, please contact us today.