Startups as their name implies are in a critical stage in their business life. They need a great team and most importantly funding. However, obtaining funds for the business is not an easy process. It requires preparing documents, liaising with lawyers and approaching investors etc. Throughout the fund raising process it is good to keep in mind the different kind of investors a startup needs. Often a startup will attract Financial Investors or Strategic investors. Both of these investors have different characteristics, and can play a crucial role in helping startups to succeed.
Financial investors are attracted to a startup’s possible financial returns. For the most part these investors are not involved in formulating the strategic vision of the business nor in the operations of the business. Financial investors can be family, friends, angel investors or venture capital firms (VCs). Family and friends usually invest in what’s called a “pre-seed round” or, in other words, at the early stage of startups. Pre-seed rounds do not often entail a large funding round. Subsequent funding rounds such as “Series A” are categorised as bigger funding rounds. These later rounds often involve sophisticated investors. Sophisticated investors include “angels” and VCs. An angel investor is an individual that provides capital for startups in exchange for a stake in the business. They can play an important role in helping the business succeed, attracting more investors, and solidify the business’ reputation. They are often heavily motivated by the individuals who started the business. On the other hand, VCs are motivated by the financial gain on their investment. Often they are not concerned with how a businesses is operating day to day, or with providing strategic advice. Every VC has a different business model, meaning some VCs can be a good fit with a particular startup and some are not.
Any investor, whether an individual or corporate, which is not purely interested in the financial gains can be described as a strategic investor. Strategic investors are often those that have particular knowledge in a niche sector and seek to work with the startup they have bought a stake in. They are known for working with companies to further both the company’s and their own vision of a certain sector. Strategic investors can also be useful when seeking to break into the sector they have knowledge in. There are clearly benefits of having strategic investors on board. However in some cases they can also hinder the progress of the business. To remedy this there has to be an alignment in vision, priorities, and goals.
It is not easy to be a startup. A lot of work needs to be done, and there is not enough time in the day. Juggling building a company, networking, meetings and among other tasks can be daunting. Thus, business owners need to be mindful in choosing their investors as these investors will be their partners.