Types of Startup Investors
What are the different types of Start-up Investors and how they differ from each other
There are lot of queries on the types of startup investors and how they differ from each other. In this article I will try to cover as much possible, on various investors. One of the main and most early problems that hound the founders is of arranging finances. Bootstrapping is a difficult path. Some entrepreneurs who are capable of financing their business opt for this option, as the learning curve through this path is quiet steep and it also allows them to retain the controls in their hands. But, most of the startups have to go for funding. (For a complete guide to become an entrepreneur from a wannapreneur check wannapreneurs who always say have to do something.)
What is Funding?
Funding is basically a process in which an organisation or individual or government provides money, time, efforts for a particular purpose. Funding has become a very popular and motivating concept amongst the young entrepreneurs, since these entrepreneurs’ mind is filled with creative and innovative business ideas and funds being the only constraint.(Check what investors look for in a business before investing to top the favourite list of investors) On the other hand high returns in a comparatively shorter span of time is what attracts the rich investors who are searching for such channels to invest.
Types of Startup Investors
Who funds the startup or the type of investor much depends on the stage of the startup.
The Egg Stage
Startups might need capital from the very starting stage or from the inception. At this stage startups might have a very good idea but not sufficient capital to kick-start. Only the people who have confidence in the potential of the idea would be willing to part their hard earned money for the idea and the team. Remember they are also not doing it for charity; they are buying stocks at the cheapest price and if the idea takes off (as founders and investors together believe in it) they are going to reap the maximum benefits.
This generally happens in the initial phase of the startup when it is in the take off stage and the founders do not have enough credentials to convince any angel investor. Though it seems to be the easiest way out, convincing rich friends and family members about your idea and sharing equity with them but at the same time it should also be kept in mind that it can complicate the life even more. Mixing business with family and friends ought to be an astute move. One might loose both on loosing one. It is always advisable to have partnership agreement with the investor friend to avoid any misunderstandings later. It should also be kept in mind that such personal investors generally are not good advisors. They might not have the competent domain knowledge or experience in the related field. It is recommended to raise funds from an accredited investor only. SEBI defines Accredited Investors” includes: (i) Qualified Institutional Buyers (“QIB”), (ii) Indian companies and high net-worth individuals having a net worth of INR 200 million (approx. USD 3.33 million) and INR 20 million (approx. USD 0.33 million), respectively, and (iii) Eligible Retail Investor (ERI), who is an Indian citizen / NRI complying with the proposed criteria.
Since friends and family cannot act as a guide, do not have helpful contacts one might consider raising money from angel investors. These are again individual investors, (or sometimes they form a group called angel network and collectively invests in a venture) who believes in the idea and invest in it. They do it in exchange of equity in the startup. This is a more professional deal. In exchange of equity the startup not only gets the fuel money but also some guidance.
This is the most recent type of angel investors – the new entrepreneurs. Snapdeal investing in Freecharge and PepperTap, Flipkart investing in News in Short, Ropos, Mad Rat Game and Abhishek Goyal (Traxcn) investing in 30 start ups are the few examples of the changing trend of raising funds. The new comers are betting money on potential ideas at a very nascent stage and buying good deals.
Incubator is the platform, which provides companies with mentors, physical space to work, sometimes and classes also. This is generally required at inception stage even before the launch of startup and product. Accelerator though performs the same way incubator does but as the term itself suggests they guides startups at different levels.
The chick stage
Venture Capital Firm–
The basic difference between an angel investor and venture capital firm is that the former invests his own money while the later is a pool of other’s money to be invested. VCs generally do not invest at the seed stage, rather only when the company in question has achieved some milestones and have promising returns on their investment they invests. As against angel investors, VCs have a much professional approach and much more to give in form of guidance, contacts and other resources.
Entrepreneurs Investors –
This community helps startups at this stage as well. Snapdeal invested in PepperTap in Series B funding, when the company had proven its metal and already raised seed and series A funding from other sources. Similarly Binny Bansal (Flipkart) invested in News in Short in series A funding. Startups funded by entrepreneur- investors like Sachin Bansal, Binny Bansal, Kunal Bahl , found it easier to raise further round of funding. PE investors also believe in the investment of successful entrepreneurs as they have the best experience of startup in Indian industry and they know the know how of the business. One such example is News in Shorts (now inShorts), which raised their angel round from Flipkart founders and then the next round was funded by Tiger Global (who is also the investor in Flipkart). Similarly Delivery backed by Abhishek Goyal currently raised Series D funding from Tiger Global.
The Hen Stage
When a startup reaches the hen stage and starts laying golden eggs, raising money is even more difficult. Every company no matter at what stage requires growth capital. At this stage one might not be willing to share his equity as this seems a tough deal and loss of control at this point might hurt their future plans for the company.
They are like venture capital firms the only difference being they charge high interest rates for the money they provide. Regardless of the profitability of the business one has to pay the amount in the stipulated period of time. A warrant from the company is issued stating the shift of control to the Venture Debt Firm on liquidation of the fund receiving company (God forbid!) For more details on how to choose between debt and equity visit debt vs equity for startups
It is not that Venture Debt is not an option at the egg stage but since at an early stage startups might not be earning regular and good profits, returning investors money with heavy interest doesn’t seems a viable option. Also, Venture Debt investors do not easily fund at egg stage as they also want to lend in a startup with good PE fund backing.
Banks generally don’t finance startups owing to high risk involved, lack of fixed assets and collaterals. However Indian government is taking initiatives to fund upcoming startups in MSME. RBI has also earmarked a fund of 2000 Cr for startups. But since if the startups are in the Hen’s stage meaning making good profits and have spent at least 3 years in business then they can approach banks. Yes Bank partnered with Snapdeal and Freecharge for multiple innovations. Ratnakar Bank invested in Trifecta Venture Debt Fund, India’s first AIF(Alternative Investment Fund).
Investment however cannot be formally categorized into different types. There is a thin line differentiating one from the other and many times they are overlapping. Thus funding is not the end it’s the beginning. Just like you change gear in your car similar is the concept of funding.