When starting a business the need for capital injection is often inevitable. Bootstrapping is possible but it is hard and tends to fall short of the capital needs. That is why the option to approach investors or financiers becomes an option. There are different types of investors that you can consider. Broadly, there are two types of investors – institutional investors and individual investors. Both have their own upsides and downsides. This poses an important question; who should you approach, an institutional or an individual investor? Let us break that down for you.
What Is An Institutional Investor?
An institutional investor is a large organization e.g. banks, insurance companies, mutual funds, pension funds, or financial institutions, which have considerable cash reserves that need to be invested. In essence, they typically invest money on behalf of others.
What Is An Individual Investor?
This is an investor who purchases relatively small stocks or finances relatively small investments for their own portfolio, from their own money. They can also be referred to as a small investor. Another common name for an individual investor is a retail investor.
Institutional Investor Versus Individual Investor – Pros And Cons
Amount Of Capital Accessible
Institutional investors obviously have more money to invest than individual investors. However, this means institutional investors may not be keen on investing in small investments. This means if you need a small capital amount, you may not get it from an institutional investor. This also means when looking for substantial amounts of capital you are most likely to access from institutional investors. Smaller amounts are easily accessible from individual investors.
Extent Of Resourcefulness
Then there is the issue of resourcefulness. Institutional investors have way more resources than individual investors. This means they are better placed to empirically inform their investment decisions. This is great for both them and even you since you can get access to valuable information. However, their resourcefulness can also make it harder for you to meet their requirements. This is because they may need comprehensive information that you may not be able to easily get.
On the other hand, this means there is a greater risk for individual investors. Though they may have calculated considerations they just may not have comprehensive information and resources. This means it can be easier to access capital from individual investors due to that dynamic. However, due to the greater risk involved, individual investors will tend to have a hefty required rate of return to cushion against that risk factor.
Rigor Of The Process
With institutional investors, you are not just dealing with one person. You will be dealing with lengthy chains of commands. Thus decision reaching will typically not be that easy and fast. It is understandable for the institutional investor because due diligence matters. However, for you, it will be greatly inconvenient especially if you need the capital as soon as possible. There is also that rigidity element.
As in, the system of an institutional investor is typically fixed and no compromises can be made in your favour. This is all, unlike an individual investor who can literally hold all the decision-making power. You also enjoy the benefits of interacting with individual investors directly. This makes it possible to get some compromises if you are failing to measure up in some regards. Plus the process will overall take a shorter time for decisions to be reached.
Important To Note: These are just 3 elements to demonstrate that both have their pros and cons. Notice, what is considered a con is usually a good thing for the one characterized by it. It all makes sense when you consider heightened thrusts to do proper due diligence. This intricate mix of pros and cons is also why it can be hard to choose between the two. That is why we have to get into how you can make the best decision about who to approach.
What Is The Bottom Line – Institutional Or Individual Investor?
Who then should you approach? This is not really a straightforward A or B question. It all boils down to the context and circumstances at play. We have established that institutional investors have loads of resources plus loads of money. If you are looking to access large capital amounts you would want to approach institutional investors. This is because they have the money and they can provide invaluable support and guidance. After all, they will be eager to protect and guarantee their return on investment. However, you will have to be prepared to deliver. This is because returns for institutional investors are often expected in the short term. Thus you should only approach institutional investors when you are certain of your business venture.
Then, accessing capital from individual investors will tend to be less tasking. Requirements will tend to be less stringent. There usually is a long-term aspect meaning you may not have the pressure to produce returns in the short term. Even if you are looking for small capital amounts you will be able to access them. There is that liberty of direct access to the investor. This may prove useful in getting relevant support and guidance. This usually happens because the investor does want to ascertain their return on investment. If you can find such individual investors, that would be ideal.
At the end of the day, you must carefully look at your needs, context, and circumstances. It is not cast in stone to say that institutional investors are better than individual investors (or vice versa). You have to weigh your options. You especially have to consider which aspects are the most definitive for you. For instance, approaching an institutional investor may solely be due to the hefty capital amount you are seeking. Then approaching an individual investor may simply be because they have experience in the field you are interested in. All in all, you have to figure out what matters the most to you. Take time to arrive at your decision on who to settle for.
