Not every investor is the same and choosing the right investor is critical to your company’s success. All investors can be categorized by three criteria:
- An investment amount
- The level of involvement
- The investor’s role in a company
An investment amount
All investments fall into one of the three categories: an angel investment, a venture capital investment, or a private equity investment.
Angel investors would typically invest up to $250K. They usually fund early stage companies, take the most amount of risk and invest the least amount of money, as compared with the other investor groups.
Venture capitalists invest anywhere from $250K to $100M over several rounds of financing. The more money they invest, the further along your company has to be in terms of the level of revenues, the amount of cash on the balance sheet, and overall development.
Private equity firms make investments in the amount of greater than $100M and invest in more mature companies.
The level of involvement
Investors can be passive or active. Active investors are those investors that take an active role in your company. They help you evaluate your progress, make better decisions, and resolve any issues as you build your company. Passive investors are those investors who simply stay out of your way. Depending on how much oversight you need and want, you should consider which investors you’d like to bring onboard.
The investor’ role in a company
Finally, investors can be strategic or financial. A financial investor is simply someone who gives you money. A strategic investor is another business that is either in the same industry as you are or in an industry complementary to yours. Further, a strategic investor may give you access to their resources in addition to or instead of the financial investment.
You may think that a strategic investor is always great news, and that is absolutely the case when your company is more established. However, I caution against partnering up with a big company too early without you able to properly protect your intellectual property or having the first mover’s advantage. The reason is simple: as a small company, you have no leverage and therefore may fall an easy prey to a bigger company willing to take advantage of you and having the ability to do so. Therefore, it is best to pursue strategic partnerships at a later stage.
When you look for investors, you should consider the amount of money you want to raise, whether you want them to be passive or active, and strategic or financial. You should also ensure that you meet their investment criteria, examples of which include: a sector, product readiness, traction, revenue levels, cash flow levels, market size, and team’s track record.
To learn more about fundraising strategy and startup financing vehicles, check out Course # 5: Fundraising Strategy and Financing vehicles.
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