Categories of Investors for Startups

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Categories of Investors for Startups: Friends and Family

The friends and family category of investors are one of the main financing options in the early financing phases. Their typical investment ranges from $10,000 to $150,000, and they focus primarily on funding in the early stages.


Brief Overview

  • Family members and friends are listed second amongst the leading startup funding sources, as reported by Quick Sprout.
  • Up to 38% of the founders of startups admitted to accumulating funds from family members and friends.

Typical Investment Size & Roles

  • Usually, they are individual investors and invest $10,000-$150,000 of their finances in the startup, as they have faith in the startup concept. These individuals have loyalty and close affinity towards the founder and are invested in their success.`
  • According to Fundable, a crowdfunding site, the average individual investment for this category is $23,000.
  • The estimated valuation of the startup involving this group is typically $0.5-$1 million.

Typical Investment Stage


Role of Friends and Family

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Categories of Investors for Startups: Angel Investors

Angel investors are entrepreneurs or affluent individual who provides capital for a business startup, in the form of convertible debt or ownership equity. In the United States, startups receive an average of $450,000 from angel investors.

Description

Stage of Investment/Amount Invested

Initial Roles

Transition Roles

  • Angel investors provide insights for future investors into business with the potential to succeed through their evaluations of numerous startups.
  • They set startups on the right part to successful and sustainable growth through their technical, financial, and marketing advice and commitments.
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Categories of Investors for Startups: Early Stage Venture Capital

Early stage venture capitalists are a form of VCs (venture capital firms) which are a type of private equity, a form of financing which is given by firms or funds to small, early-stage companies that are deemed to have high growth potential. Typically, early stage venture capitalists are looking to sell their position within eight to ten years. For their investment, early stage venture capitalists will ask for two things. The first is the corresponding equity in the company that will reflect their investment in money, and the second is board involvement in the company.

Early stage venture capitalists

  • Early stage venture capitalists are a form of VCs (venture capital firms) which are a type of private equity, a form of financing which is "provided by firms or funds to small, early-stage, emerging firms that are deemed to have high growth potential, or which have demonstrated high growth (in terms of number of employees, annual revenue, or both)."
  • The specific quality of early stage venture capitalists is the fact that they are looking for their investments to be acquired or go through an IPO where the early stage venture capitalist firms are able to sell their position.
  • Typically, early stage venture capitalists are looking to sell their position within eight to ten years.

Typical investments and roles linked to the investments

  • Early stage venture capitalists typically buy in equity between 15% to 45% of a start up. Early stage venture capitalists are usually investing on the higher end of that range.
  • For their investment, early stage venture capitalists will ask for two things. The first is the corresponding equity in the company that will reflect their investment in money.
  • The second is board involvement in the company, which can be reflected in a set in the board of directors, or a board observer role which means they get an invitation to board meetings without the role but still have lots of influence.

Typical investments stage

  • The typical investment stage for early stage venture capital firms is Series A. In this stage of funding, early stage venture capital firms are looking for something more than just an idea, and will be looking for the start up to present a strong strategy.
  • This stage is considered less risky than pre-seed and seed funding, which are the two initial funding stages, usually funded by the start up founders themselves (pre-seed funding) and angel investors (seed funding).
  • The most common investment for firms going through Series A funding rounds is linked to the valuation of $15 million per firm.
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Categories of Investors for Startups: Late Stage Venture Capital

Late-stage venture capital investors invest in already-established startups that have a viable and profitable business model in exchange for an equity stake. This category of VCs are primarily interested in liquidity; hence, they provide funds to raise the valuation of the startup and look to cash out in the event of an IPO or acquisition by a strategic buyer.

Brief Description

  • Late-stage venture capitalists (VCs) are investors who typically invest in already-established companies/startups.
  • These startups, in their later stages, have well-known products, strong customer bases, strong market presence, reached the stage of generating profits, are viable and are looking to expand into tangential markets, develop new products or even acquire new companies.
  • Usually, such startups already have "established commercial production, basic marketing set-up, and must have shown unprecedented success in marketing and selling their products in the US."
  • These VCs invest in successful startups in a move to obtain more than double of the amount invested. "They seek liquidity as the company begins to position itself for an acquisition or an initial public offering (IPO)."
  • According to Investopedia and Crunchbase, investments in the late-stage of startups include funding in Series C and upwards or third stage capital, as described by Funding Post, but before an initial public offering (IPO).

Typical Investment Amount

  • According to Statista, as of June 2018, the median deal size of later stage VC-backed companies was $11.5 million.
  • In Q1 2019, 538 late-stage VC deals were closed, which amounted to $21.4 billion. This shows that the average deal size invested was $39.776 million. However, research conducted by Callan Institute shows that the average investment is about $60 million.
  • Furthermore, the average Series C and D investment sizes, which are late-stage investments, are $33 million and $55 million respectively, as per the research conducted by Callan Institute.
  • PitchBook published a breakdown of the top US VC firms by deal count, with information on their early- and late-stage rounds in 2019. This report shows that their late-stage median deal size ranges from $0.4 million to $107 million. Some VCs profiled include SOSV ($10.3 million), Lightspeed ($68.5 million), Sequoia ($107.3 million), Bain Capital ($40 million), among others.

Typical Investment Stage

Roles Played in a Startup

  • Late-stage VCs primarily provide funding for startups, as they are more interested in the returns on their investments by "providing the final injections of capital needed to ready the company for the IPO, in the hopes that it will boost the company’s IPO valuation."
  • Late-stage VCs do not usually involve themselves in the company operations, as such, may not hold formal roles. Moreover, startups in this stage are already established, with a proven business model that yields strong revenue or profit.
  • Late-stage VCs identify startups with "high top-line growth rates (typically above 30% annually) to balance the risk profile of these companies; invest in them, and then look to quickly exit to earn their returns."

Roles Played in the Transition to Later Investment Stages

  • The next investment stage after the late-stages is either going public (IPO) or acquisition by a strategic buyer.
  • As already highlighted, late-stage VCs mainly seek liquidity by investing in profitable, viable, less risky startups, with hopes of raising its IPO valuation and then, exiting to earn their returns.
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Categories of Investors for Startups: Private Equity Investors

Private equity firms are almost always later-stage investors in startups, and these investors provide either substantial capital infusions within follow-on funding rounds or purchase startup companies in their entirety.

Private Equity Firms Overview

  • Private equity is a category of investors that typically target larger companies that are looking for support with growth or exit strategies that isn't available through traditional financing.
  • These funds are formed from Limited Partners, such as pension funds, insurance companies, endowments and other high net worth organizations or individuals, who are looking for access to high yield investments.
  • Most commonly, private equity firms operate under the model of Buy, Change, Sell, wherein they acquire an entire company, restructure the business operations and then look to sell the company for a profit, either to another private investor or through an IPO.

Typical Investment Size

  • Generally, private equity firms make investments of $100 million or greater, up to billions of dollars per investment.
  • However, particularly in the startup community, there are private equity firms who have made smaller deals at a value of as little as $5 million.

Timing/Stage of Investment

  • Commensurate with the typical investment size, private equity traditionally participates in startup fundraising at the later stages of company development and as part of the startup's later funding rounds.
  • In particular, private equity investment generally occurs in startups that have demonstrated growth potential, assets to leverage and existing revenues in excess of several million dollars.
  • As such, private equity investment typically occurs during a Series C capital raise or subsequent rounds, and is most represents the investment through which a founder will partially or completely will exit his/her stake in a startup.
  • However, it is becoming increasingly common for niche private equity firms to specialize in acquiring startups at an earlier stage in their development, at a time when a startup might normally complete Series A or Series B funding rounds.

Role in Startup Investment

  • Private equity investors generally look to purchase entire companies, rather than invest in a startup for a smaller portion of equity.
  • With this in mind, private equity investors are typically accustomed to total control of the board and company upon their assumption of ownership.
  • However, in some cases, private equity firms will invest in a startup in exchange for partial equity ownership in the company.
  • In these instances, a private equity firm would similarly receive the accompanying level of formal (e.g., board seat) and informal influence.

Role in Later Transition

  • In such cases where a private equity firm makes a partial investment in a startup and delays an outright acquisition, the firm does so with the intent of either acquiring the company at a later date, or receiving a return on its investment as a shareholder through an IPO or subsequent company sale.
  • As such, the private equity firm would either obtain complete control of the company and board (in the event of the firm purchased the startup company), transition to the role of a shareholder and/or board member after the startup completes the IPO process or fully unwind its investment in the event of a private sale.




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