The three most common types of investors are generally referred to as angel investors, venture capitalists and corporates. The more you know about their different approaches and expectations to investing the easier your funding search will be.
Usually (but not always) angels are best suited to businesses in their early stages, venture capitalists to later stages and corporate investors at the end.
All investors, however, have one thing in common: they expect a return on their investment.
Angels
Angel investors are usually successful business people with spare cash they can invest in high-growth companies. They often invest in industries they know and have contacts in so they can reduce risk and offer expertise, capability and advice.
Angels expect a decent return and usually want some ownership. Funds will range from around $100,000 to $3 million. Often Angel investors will work in groups pooling money to invest in deals.
Find out more from the Angel Association
Venture capital firms
Venture capitalists (VCs) can be defined as investment companies or fund managers that give cash for part-ownership of your business. They favour high-growth, well-established companies likely to provide an average 30-40 percent annual return on their money.
Venture capitalists take a structured careful approach to investing. Usually managing money or pooled funds on behalf of banks or high net worth individuals, they are not usually interested in small investments.
Before they invest, you should be prepared for a very thorough investigation of you and your business (due diligence). They will also expect part ownership, to play an active role in the business, and to exit after three to five years with a return of 500 percent to 1,000 percent.
This may seem high, but venture capital investing is a risky business that tends to operate by the 2-6-2 rule – for every ten deals two will be failures, six will return average results and two will be very successful. So VCs need to recoup more from successful businesses to make up for the duds.
Venture capitalists can add significant value to your business. This might be via strategy advice, industry knowledge and experience of taking products or services to commercialisation through to helping with strategic alliances and international networks. They will work with you to ensure their investment is as successful as possible. And they will drive a hard bargain.
Usually operating on a fixed time frame (often three to five years), VCs exit a business by one of the following:
- selling their shares back to you (a buy-back deal)
- selling their shares to another investor
- selling when the whole company is bought by a larger company (a trade sale)
- helping list your company on the local stock exchange and the shares are then sold to the public (an Initial Public Offering, or IPO).
Find out more from the New Zealand Venture Capital Association
Corporate
Corporate investors are larger companies interested in buying you out, rather than in high interest rates or a percentage of the company.
The most common investment exit strategy for venture capital firms is through a trade sale to a corporate investor. Often a multi-national, a corporate investor usually looks for synergies with their business, increased sales, a superior technology or exceptional staff.
Unlike venture capitalists, corporate investors often buy companies for the long haul and don’t want to exit.
Do research on the investor
Finally, remember that funding is a two-way process. A potential investor will carefully research your business, and you should do the same to them.
Not all funds are secure or appropriate. For example, you might base your plans on a corporate buy-out, but then find yourself in trouble because the corporate goes into liquidation.
