6 Different Types of Startup Investors
Fundraising — 8 min read
The vast majority of startups need funding to get off the ground. Most startups that survive go through multiple rounds of funding, from a pre-seed round, to a seed round, to series A funding and beyond. There are many types of startup investors and knowing the difference between them, at which stage they typically invest, and when they are relevant can save first-time fundraising founders a tremendous amount of time.
Successfully navigating the fundraising process is much easier when you understand the different kinds of investors you will be working with along the way.
The very earliest funding usually comes from angel investors. These individuals are typically not part of an investment firm and invest their own money—essentially from their own pockets. Your first $20-100k will very often come from these types of investors.
It can be challenging to attract professional angel investors during your pre-seed fundraising when you may not have anything more to offer than an idea. The first investments often come from family, friends, or other personal relationships. Even if they have relatively little money to offer, their investments count as votes of confidence as well. Later on, professional investors with deeper pockets might hesitate if they hear that you weren’t able to gather any support from the people who know you best, and it always instills some extra confidence in a new investor when they know you were able to get someone else to buy into the idea.
Angel investors that invest in a high volume of deals every year (10+) are usually more approachable and the way to reach them is typically through a founder they have previously invested in. In other words, use your networking skills and get in touch with founders in your space that already have some funding.
Hint: Crunchbase and AngelList will be your friends in the research process.
A family office is a private firm that provides wealth management services for a high-net-worth family. Often, these services include investment management. Family offices are similar to angel investors because they favor startups in their early stages, but they are often able to invest larger amounts of money.
Family offices are an increasingly common source of startup funding. According to a 2020 survey, 76% of family offices invest directly in startups. They can have a wide variety of motivations for investing, such as receiving tax benefits or building multigenerational wealth, so you will likely have different experiences working with each. Networking is the key to getting in touch with family offices as well and most won’t invest without a warm intro.
Accelerator programs are programs offered by organizations that want to give startups the resources to grow to their full potential, usually during the pre-seed or seed stage. They can provide funding as well as other benefits like a space to work, access to mentors, and opportunities to showcase your product. Completing an accelerator program is also a great way to boost your startup’s reputation and frequently leads to opportunities to connect with other seed-stage and post-seed investors.
Well-known examples of startup accelerators include Y Combinator, Techstars, 500 Startups, and StartX. Different accelerators will offer different levels of funding to the startups they accept, with most offering between $50,000 and $150,000. There are some accelerator programs that come with substantially larger investments, however. Y Combinator recently announced that they will begin investing $500,000 in each startup they select for their accelerator program.
Getting into an accelerator is usually driven by merit and the founder's ability to tell the story of their startup. In other words, you don’t need an introduction to get in, but you do need a good application and many accelerators let alumni recommend you.
Hint: Early traction and a good founder story can be tremendously helpful to get accepted.
Angel syndicates are groups of angel investors who co-invest in startups with other angel investors. As a category, they are typically willing to invest in startups at any stage, but different syndicates may be looking for different kinds of opportunities in particular.
Syndicates usually comprise a leader and multiple backers. The leader is almost always an experienced investor with deep connections and access to large amounts of capital. Backers contribute funds to the investment pool but let the leader manage the investment. This allows leaders to place larger investments (and reap larger rewards should the business achieve success) and enables the backers to take advantage of investment opportunities to which they may not otherwise have access.
The most popular platform for angel syndicates is AngelList, which provides an easy way for accredited investors to connect with startups. As a founder, you can apply to have your startup listed on the platform and, if selected, you’ll be matched with a list of registered investors who might be interested in investing. Angel investors regularly form syndicates on AngelList by backing a lead investor who has a large network and is frequently invited to invest in promising startups.
Chances of discovery are higher if you already have some investment from individual angels or smaller funds. Many angel syndicates will only invest if a certain amount of the round is already subscribed (meaning other investors have committed their money already), which they know gives them leverage to raise from their angel network.
Venture capital (VC) firms are professional investment firms that offer funds to startups they’ve identified to have high growth potential. They are highly selective in choosing their investments because venture capital as an asset class is incredibly risky and is predicated on a model where most investments fail; however, the ones that don’t fail have the potential to become extremely big and lucrative for the VC. Knowing this, VCs usually want to see a market opportunity for at least $1 billion when the founder pitches them.
VC firms regularly fund startups in all different stages of growth. Some VCs specialize in funding startups only in certain stages or in certain industries, and some will fund any startup during any round. They come in all different sizes as well; smaller VC firms might manage less than $50 million in assets, while the larger ones could manage assets totalling $5 billion or more.
You might have heard of well-known VCs like Sequoia, a16z, General Catalyst, Bessemer, and Accel, but there is a large undergrowth of smaller, lesser-known firms as well. Many of these smaller firms could be a great fit early on as they just might specialize in the industry you’re in. Don’t discount the big ones entirely, though—sometimes they do come in early.
General partners vs. limited partners
Venture capital firms organize VC funds by pooling money supplied by outside investors. These funds essentially function as limited partnerships consisting of at least one general partner (GP) and at least one (but usually more than one) limited partner (LP).
Typically, general partners are employed by the VC firm and are responsible for managing a fund and its portfolio. In addition to their salary, they are also paid a management fee, which is taken as a small percentage of the total amount of capital pooled in the venture fund. They also earn carried interest, sometimes simply called a carry, which is taken as a percentage of the total profits the fund earns after being invested.
Limited partners are individuals or entities who have invested money into a venture fund but are not part of the VC firm raising and allocating the fund. They are passive investors who provide the capital for VC funds and get a small cut of the returns based on the amount and timing of their original investment. However, they bear no responsibility for the fund itself.
Broadly, private equity investments are investments made by firms or individuals in companies that are not publicly listed, including startups. Private equity firms and venture capital firms share some similarities, and the two are sometimes incorrectly conflated. However, they are two distinct types of investment firms with important differences.
A venture capital investment is a type of private equity investment that funds a promising startup in its early stages for the purpose of accelerating growth. Venture capital firms tend to look for the startups with the greatest potential for the highest returns.
Private equity firms invest large amounts of money (often several hundred dollars or more) in mature companies or startups that are already well underway, usually at the series C funding stage or later. These firms look for opportunities to invest in companies that already have some tangible value to offer and are growing already, not just potential or early growth.
Private equity investors typically claim higher amounts of equity in the companies in which they invest, sometimes buying out companies completely, whereas venture capital firms normally claim less than 50% equity of the companies they invest in.
Finding the Right Investors
One of the most critical aspects of your fundraising strategy is your ability to determine which investors will be a good match for your startup at each stage of the process. Some types of investors are only interested in investing in companies at certain stages of growth, and others are stage agnostic, meaning they are willing to invest in companies at any stage.
The pre-seed and seed stages are often funded by angel investors, accelerators, and smaller VC seed funds. Family offices also frequently invest in startups during the early growth period, but not exclusively.
Many angel syndicates and venture capital firms are stage agnostic, but some only consider investments at particular stages. For example, most of the larger VC firms invest in series A or later, with some exceptions at the seed stage.
Private equity funds can be massive, sometimes tens of billions of dollars— for this reason, they are typically reserved for companies that have already gained some traction and have reached series C funding or later.]
By knowing the differences between investor categories, you will improve your odds of connecting with the right investors for the particular round of funding your startup is planning.