Read time: 5 mins
The Five Types of Venture Investors
With any new venture or startup, it’s important to not only know who the investors are, but also what motivates them. So, if you’re looking to start a business, it’s best to first consider the five types of venture investors out there, be they founders, friends and family, or even angel investors, and which one would be best suited to your new venture’s needs.
Find out more with Thomas Hellmann, Programme Director on the Oxford Entrepreneurship: Venture Finance Programme from Saïd Business School, University of Oxford.
Transcript
We’re going to take a real look at the investor landscape. It turns out that they’re not all the same. In fact, they come in a great variety of sizes, shapes, and we want to understand who are they? Why are they investing? What motivates them? In order to sort of understand the landscape of investors, we’re going to put them into, broadly speaking, five buckets. Let’s begin with the first bucket.
Founder financing
It’s a bit of a cheat because it’s not an investor. It’s founders funding their own companies. Sometimes that’s called bootstrapping. What it means is that the founder is either using personal savings or some kind of personal credit to fund the operations of the business. Founders typically do this in the very early stages of the company. And typically this is meant to transition them into getting money from all the other buckets, from all the other categories that we’re going to be looking at thereafter.
Family and friends
Now, the first external money typically often comes from family and friends. And if you insist, it’s actually called family, friends, and fools. Most of them, they give you the money because they love you. They think you’re great and they’re not terribly critical of the business. So it’s really money that’s given on the basis of a relationship. But as the founder, you should be aware of some of the strings that may be attached with it.
Angel investors
The third bucket is angel investors. Angel investors are private individuals who fund start-ups. The term actually comes out of Hollywood because angel investors was the term used for those who financed films where nobody else wanted to finance. Angel investors, the best way to think about them is wealthy individuals who can fund a company.
But individuals that don’t have a prior social or family relationship to the founders. And that’s why they’re different from the initial category of family and friends, because these are basically people that the entrepreneur has to go and find and ask them for their money, their private money. Importantly, angel investors invest their own money.
Crowdfunding
The fourth bucket is crowdfunding. Now this is a confusing word. And just to be clear, crowdfunding is not really an investor, but it’s a method of connecting entrepreneurs to a set of investors. Oftentimes these other investors are actually angels, so they could even be family and friends or other investor types. So what’s unique about crowdfunding is that there’s an intermediary, a platform, that helps entrepreneurs connect with investors. In the world of crowdfunding, there are four broad types. There are crowdfunding platforms that basically work with donations or simple rewards. There is lending, so, debt-based crowdfunding. There is equity crowdfunding, and the latest innovation is tokens or coins. So this is in the world of crypto financing and it’s called initial coin offerings or security token offerings.
Professional investors
The final, fifth bucket, is a very large bucket. It is all the professional investors, that is to say, organisations who have funding that can be deployed into start-ups.
The big elephant in the room is going to be venture capital. Venture capitalists are professional investors who have funds. They’ve received money from institutional investors. Venture capitalists then have a job of investing in these companies and taking them to success.
In addition to venture capital, there are a number of other financial investors. They could be hedge funds. They could be banks, they could be other types of financial vehicles. And in the professional investor category, you also have corporations. So it turns out companies like Intel or Bertelsmann actually make venture capital investments, but they are corporations.