4 Types of Investor for Small Businesses & Startups

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There are different types of investor and searching for the right investor is a right of passage for many entrepreneurs. We go through 4 different types of investor for small businesses and startups in this post.

“Knowing your story is about knowing how to tell it.” – Chris Westfall

Depending on the type of funding you’re going for you may need to be interviewed, present to a panel or take part in a pitch day. Even if your aren’t searching for an investor, a pitch is an integral part of your business plan, and will become a natural way of expressing what your business does to potential partners and even clients.

As your search for funding and grow your business you’ll find time-and-again that you need a quick, slick presentation about your business that you can give anywhere. 

But, your presentation won’t always be exactly the same. It will vary, depending on your audience, and depending on what you want from them.

This makes it a good idea for you to have a business presentation or ‘pitch’ ready that you can update and tailor to the audience you are presenting to.

So what is a business pitch?

A pitch is a brief description of your business explaining your idea in a way that allows anyone to understand it quickly. Presenting a strong pitch to potential investors is incredibly valuable since it can open the door to the funding process. So, it’s important that you have a good one at the ready. 

When pitching you should make a conscious effort to persuade others that your business is interesting, viable, and worth investing in. 

Elevator pitch examples

To help inspire your pitch, I’ve put together a set of video resources, and a guide to creating you own pitch. You can find them in this article, which includes:

  • Why is a pitch important?
  • What a pitch should include (and what it shouldn’t!)
  • What makes a pitch effective?
  • The best way to end your pitch

Crafting your elevator pitch to the right audience

One of the most important things to remember when pitching your business idea is to have your audience in mind. A good pitch is a conversation, something that engages with your audience’s own interests and goals. 

This is especially important when speaking to investors – as the results of the conversation could prove very important to the future of your business. 

4 types of small business investors

Some kinds of investor are more well known than others. Here’s a shortlist of the 4 major types of investor:

Angel Investors

An angel investor is normally a wealthy individual, like a dragon from Dragon’s Den, who is willing to invest in you and your business idea. Theirs is a personal stake and pretty high risk for them. A number of their investments will fail. They are generally looking for a good return on their investments, although not always, and they take their rewards for backing you through shares in your company or a bond (A formal “I owe you”) that they can redeem from your company as shares or as cash. The rate of return that they are looking for on their investment varies greatly from investor to investor. They may or may not also want some say in the direction and management of the business. 

Venture Capital

One of the types of investor is a venture capital. Venture capital doesn’t come from individuals but from specialist firms who lend to businesses in rounds (phases) of funding. The first phase of your funding is generally seed (initial funding for your business) funding (from Angel Investors). Venture capital funding is always given in return for a stake/shares in the company. Venture capitalists are generally looking for a high rate of return on their investments and would expect to see this through the sale of the successful company, floating the company on the stock market or the founder/main shareholder buying them out. They will have a say in the running, management and direction of your business, and will require regular financial updates on the state of the business.

Startup Accelerators

As a startup you and your team have to apply to join a startup accelerator or seed accelerator programme. If accepted they would then invest in your business as the seed funder and take a share in your business. The accelerator lasts from three to six months during which you are put through mentoring, product development and training programmes which culminate in you producing a pitch to the next round of investors. This is a high velocity process for businesses with the potential to disrupt a marketplace or to make a new one. A simple Google search will help you to identify industry specific and local accelerator programmes.

Startup Incubators

These are a completely different animal to accelerators but these types of investor can often get confused. Incubators are more about nurturing and helping entrepreneurs to explore and grow their business ideas. You have to apply for incubator programmes and if accepted you’ll often be offered accommodation for your business, administrative services, advice, training and support. Most incubators don’t take a stake/share in your business and are often run by non-profit organisations. Local Business Growth Hubs, Science Parks attached to universities and Business Hubs attached to business are incubators just like the more well known ones like Google Campus, SeedCloud and Level39.

Investors, Accelerators and Incubators are often industry specific. Your job is to do a bit of research through your favourite search engine and take a look to see if there’s anything available to support your ambitions and initial business growth.

Being part of an Accelerator or an Incubator can be inspiring and motivational as you are normally accepted as part of an intake group of entrepreneurs who are all going through the same process, often in the same building.

The next step – putting together a business plan for investors

That’s a lot of information to take in and quite a bit of research to do, but it will be worth it.

The last thing to do in this section is to decide which type of funding you are likely to go for and note down any costs associated with that type of funding so that you can pop them into your spreadsheet or directly into Brixx.

Next week we’re looking at your business plan. Which neatly ties into this weeks topic. Check it out here.

This blog post forms part of our series on how to start a business in 90 days. For an overview of the series and all the blog posts so far click here.

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