Startups often raise capital to build and scale their businesses. This financing can come from myriad sources—and as the entrepreneurial ecosystem has grown, so has the variety of investors startups can work with. That can include angels, accelerators, crowdfunding investors, venture capitalists, corporate and institutional investors, and more.
Different types of investors invest at different stages of company development, and have different risk profiles and expectations about their involvement in the company’s board and governance. Generally, investors receive equity—partial ownership in the company—in exchange for the money they put into the business. Investors may also receive various voting rights and preferences based on the terms of their investment.
This article will outline various types of investors for startups, as well as other ways to finance a startup that do not involve adding investors onto your cap table.
Types of investors:
Other ways to finance your startup without granting equity to investors:
Friends and family
A “friends and family” round is when a startup, typically a very early-stage startup, raises initial capital from the personal network of the founders. Friends-and-family investors are often betting on what they know about the founder rather than what they know about the vertical or industry.
Although this sort of investment may feel more informal, it should be treated the same as any other type of investment from a legal and compliance perspective. Before taking on friends-and-family funding, it's worth considering the personal costs and stress of taking financial investment from loved ones. Even the most successful startups often have a 10-year minimum ROI (return-on-investment) period, so your family and friends might not see any liquidity for quite some time. If the investment is far outside their typical risk profile and would cause undue stress, it may not be worth accepting.
The ability to raise money from friends and family is certainly not available to all entrepreneurs and likely contributes to continued inequity in the startup ecosystem. Availability depends on the assets and liquidity within your personal network.
If a friends-and-family round isn't in the cards for your startup, know that there are other options, and a startup doesn't need to raise a friends-and-family round to succeed. Many successful startups did not raise money from the founders’ families. The rest of this article will outline other sources of funding.
Equity crowdfunding
Equity crowdfunding is the process of collecting small contributions from many people, typically through online crowdfunding platforms. Some crowdfunding websites specialize in fundraising for businesses and can get the pitch out to a large group of general investors ( unaccredited investors included).
Examples of crowdfunding sites include Republic, Fundable, and Microventures.
Angel investors
Often former entrepreneurs themselves, angel investors are typically high-net-worth individuals who invest their own money. They invest at early stages such as the seed or pre-seed stage and write smaller checks than venture capital firms managing pooled investment funds. These early investments often come in the form of convertible instruments, like SAFEs, rather than priced rounds.
Because they are investing in the earliest-stage startups, angel investors are often comfortable with a high-risk investment approach. Angels may put small amounts of money into several businesses, knowing that many early-stage companies will fail but that an early bet on a winner could return the investment many times over. Angel investors are often interested in backing something they’re personally interested in, such as founders in their local area, companies in their industry, or ideas they believe in.
Angel investors must be accredited investors, meaning they meet certain criteria, including $1 million in net worth, $200,000 in annual income, or proof of certain financial knowledge.
Angel syndicates
Sometimes angel investors band together to form a syndicate. A syndicate is a group of people who combine their resources to make a single investment in a company through special purpose vehicles (SPV). SPVs are legal entities that enable multiple investors to pool capital and invest in a company.
Accelerators and incubators
Accelerators and incubators are programs that can provide guidance, mentorship, and access to funding for startups in exchange for an equity stake in the company. Some accelerators and incubators also make direct cash investments in the startups they support.
Accelerators work with early-stage companies—often founders join accelerators to scale from a minimum viable product (MVP) and business plan into a growing company. Accelerator programs, which require startups to apply for participation, typically run a few months and conclude with a demo day when startups present their ideas to peers and potential investors. Examples of accelerators include Y Combinator and Tech Stars.
Incubators help startups in a similar way, although typically over a longer period of time. While accelerator programs usually take place over a few intense months, incubators are places founders can build businesses, often for a year or more. Where applicants to accelerators often have an MVP, incubators often start working with companies even earlier, when the startup may be just an idea or a promising founder is exploring a few potential ideas.
Incubators often provide a co-working space for their startup founders to use as an office during the early stages of company building, as well as providing mentorship, networking, and sometimes funding. Some incubators are geographically based nonprofits, hoping to support innovative businesses in their region.
Examples of incubators include Capital Factory in Austin, TechNexus in Chicago, and Le Camp in Quebec City.
Venture studio
One type of incubator is a venture studio, which functions as a hybrid between a traditional incubator and a venture capital firm. A venture studio will foster a startup idea from ideation, hiring a team of founders, mentoring them, and funding the venture, often through pre-seed and seed stages. Partners at the studio may stay on as co-founders as the startup grows. A venture studio success can lead to a long-term partnership, often up until an exit event like an initial public offering (IPO) or acquisition, unlike an accelerator or incubator which may “graduate” startups after three months or a year.
Examples of venture studios include Flagship Pioneering, Atomic, and AlleyCorp.
Venture capitalists (VCs)
A venture capital firm pools outside capital to invest in private companies, usually high-growth startups. Senior members of a VC firm are called general partners (GP). Unlike angel investors, who are investing solely their own money, general partners at VC firms serve as stewards of money invested by limited partners (LP), who provide the large majority of the capital (GPs usually contribute a smaller amount of funds alongside LPs).
Typically, a funding round that involves VC firms will have one lead investor, who writes the largest check, as well as additional investors who write smaller checks to fill up the funding round. The lead investor of a round will often seek to be more involved in governance and oversight than other investors. Lead investors in priced rounds may require a board seat or special voting privileges. All of that is negotiable at the term sheet stage, but is in play with VC firms in a way that is less common with angel investors, friends and family, or accelerators.
Different venture capital firms will focus on different stages; some focus on earlier stages, investing at seed and Series A, or sometimes even writing pre-seed convertible notes. Other firms focus on later stages.
In some cases, VCs who invest at earlier stages will provide additional follow-on capital, meaning they’ll fund subsequent rounds after their initial investment to enable the company to grow without adding new external partners.
Venture capital firms may create multiple funds, which have certain investment strategies. Funds may focus on a certain theme, like climate, AI, or SaaS (software as a service). Before approaching a firm, it’s important to know if their stage and thesis align with your company.
Examples of venture capital firms include: Andreessen Horowitz, Sequoia Capital, and First Round Capital.
Growth equity
Growth equity firms are private equity firms that focus on later-stage startups. These investors are looking for more-mature companies and seek to hold their investments for a shorter time horizon than early-stage VC investors.
Growth equity investors are often looking for companies that are on the road to IPO, or another form of liquidity like an acquisition, in the next few years. Growth equity investors will be evaluating companies on more-mature metrics, like revenue growth and cash flow, rather than early-stage signals like product-market fit. Growth equity investors have a lower risk tolerance than early-stage VC investors, and because they are taking a lower risk, they typically obtain a lower ownership percentage in return for their investment than earlier investors.
Examples of growth equity firms include: Summit Partners, General Atlantic, and TA Associates.
Institutional investors
Institutional investors are typically large asset managers that can include investment firms like Fidelity and T. Rowe Price, state pension funds, university endowments, banks, hedge funds, mutual funds, and family offices. (A broad definition of the term would also include venture capital and growth equity firms, but because those types of institutions work with startups in a very distinct way from other sorts of institutional investors we have separated them for the purposes of this article).
Institutional investors are often LPs (limited partners) in venture capital funds, which in turn invest their money in startups across stages. However, institutional investors sometimes invest directly in startups, especially later-stage companies like growth and pre-IPO companies.
Corporate investors
Corporate investors or corporate venture capital (CVC) is a subset of venture capital. Partners in these firms make investments on behalf of large companies that invest in startups—often those either operating within or adjacent to their core industry. Unlike VC investments, CVC investments are made using corporate holdings, not through capital from limited partners.
Examples of corporate venture capital firms are Intel Capital and GV, the corporate venture arm of Alphabet, Google’s parent company.
Other ways to fund startup operations
Raising capital through an equity financing is not the only way to obtain the cash you need to build your startup. Other options include bootstrapping or taking on debt financing.
Bootstrapping
Bootstrapping is the process of starting and growing a company using your own resources, without relying on outside capital. Bootstrapping resources can include personal savings, credit cards, using low-cost or free tools and services, or reinvesting early profits. Bootstrapping is necessary for many startups in very early stages, because they have not yet shown enough potential to attract outside funding.
Bootstrapping might mean working on a startup idea after work or on weekends and using minimal resources. For some founders it means spending personal savings on their company. Like a friends-and-family round, having the personal resources to self-fund a startup is not possible for every entrepreneur.
Some companies bootstrap by reinvesting early profits. The sort of business you’re building may determine if this is possible. A direct-to-consumer retail company that is able to start generating revenue early on would be better positioned to take this approach than, for example, a health-care startup that may require years of clinical trials before going to market.
Bank loans and debt financing
Startups, like other small businesses, can also seek business loans to grow. With a loan, rather than selling a piece of ownership in your company and diluting the ownership value of you and your co-founders and other investors, you are instead agreeing to pay back the money to the financial institution at an agreed-upon interest rate.
Securing funding through bonds and loans in this way is often referred to as “ debt financing” as opposed to “equity financing,” which includes all the types of investments previously covered.
