The journey of seeking funding for businesses is very complicated. Capital is a big concern on the startup scene with the number one reason for businesses failing, even in the richest nations in the world, being the lack of capital or finance. Before you go out there looking for investors you should probably have a good idea of the types of investors out there and their profile in terms of input and expectations.
Angel investors in most cases are high net worth individuals who invest in the very early stages of a business. For example, someone who starts their business with a small investment of a million dollars from their father can count their father as an angel investor. They often become invested due to personal relationships with the owners of the businesses. Angel investors tend not to exercise a lot of control over the running of the business or the appointment of people to run the business. It is possible to find angel investors without personal relationships. Angel investor capital is usually very patient capital. It is rare for angels to place conditions or look towards exiting the business though there are cases where they will expressly state how long they want to be invested in the venture before they pull out.
Somewhat like the angel investor but with a different profile are venture capitalists (VCs). One of the key features that separate a venture capitalist from an angel investor is the fact that VCs are unlikely to invest in getting a project up and running, they usually come in to invest in projects that are already running and looking for expansion capital for a proven idea. VCs are interested in growth-stage businesses and tend to favour scalable ideas that can rapidly grow the value of their investment. VCs may also have some influence on the staffing of a company they invest in as their goal is to maximise the value of their investment. VCs may also enter into investment arrangements with a foreseeable end to their relationship at some point in the future. There are there for growth and once growth potential has been realised they are likely to exit.
Institutional investors cover a wide range of investors that come from organised setups. These are organisations that actin in either their private capacity or on government mandates will invest capital in businesses. Insurance companies, pension funds, investment banks, asset management companies and government investment vehicles are very good examples of institutional investors. Depending on the setup of the institution they can come in at different stages of the business journey. You will find that government-mandated funds can come in from the ground up especially where the business addresses something that the government has earmarked as a priority investment area. Your private institutional investors are more likely to come in at a late stage when the business is proven and running. Institutional investors will often influence the appointment of board members in companies they are invested in.
Private investors are individuals who choose to invest in businesses in their own capacities. They are not to be confused with private equity. Private equity firms include venture capital firms that invest in businesses to improve them or aid their growth. Private investors are private individuals but not always high net worth or close relations as is the case with Angel investors. Depending on the rules associated with the chosen business structure you can have up to 50 investors in a private business so you can have private investors come in to invest. It is very difficult to map out the behaviour of these investors because they are individuals who each possess their own goals and characteristics. They can join the business at any stage and have varying time horizons so they can stick around for life or have a finite investment period. When it comes to influencing the governance and running of the business they tend not to be overly involved if at all. In most cases, the holdings are too small to control decisions and they are unlikely to be interested in that level of business being more focused on returns on investment.
Knowing the different types of investors and their profiles will help you understand the way to work with them. The different investors need different approaches as they clearly have different goals and in some cases rules around how you can approach.