The business idea already exists. Maybe a company has already been founded, or your startup is already generating first sales, but you would like it to really take off in the growth phase now. Usually, the limiting factor in this phase is not creativity, time, diligence or a strong founding team, but simply capital.
Capital is the lifeblood of every startup and therefore it is becoming increasingly important not only to combine competencies in the team within the framework of the actual startup project but also to master the basics of fundraising. Where can you find startup investors? Where do investors look for investment opportunities? And what is the role of your startup stage, i.e. development phase? In this article, we will explain the most important sources of capital.
Startup investors in the direct personal environment – Friends, Family, and Fools
One of the most obvious areas in which you can find early investors for your business idea is your direct, private environment. Friends and relatives personally know the founders. Thus, an assessment of the team and the associated competencies is possible from a special perspective, which other potential investors do not have. Also, the founders have trust in advance in case it is recognizable that the team “is committed”.
But accepting money from one’s personal environment also has its pitfalls. However, money itself is not the problem, but rather the frequent lack of transparency about the actual risk of starting a business.
Most of the startups are failing. Capital is quickly used, and sales are yet to be generated. Even if the project was promising, liquidity is running out in the meantime. The initial euphoria of private investors quickly turns into disappointment, which often also affects the personal relationship. After all, not everyone succeeds in making a clear distinction between personal and business issues.
Business Angel & Angel Investors: Wealthy individuals with a mission
Angel investors, or business angels, are mostly wealthy private individuals who want to invest their capital in new startups to create something new together in a team. Very often, angel investors are intrinsically motivated and open to actively advise the team. For startups, business angels can be very valuable, because they not only raise the necessary capital but also bring in important know-how that is otherwise difficult to access.
Angel investors usually invest within a range of 50.000€ to 200.000€ in startups, which is the very early phase, i.e. the pre-seed or seed stage. The investment possibilities are company shares, convertibles or loans.
It is important to understand that angel investors ultimately invest their own money and therefore think different than, for example, venture capital funds. In other words, business angels can sometimes have a very different strategic or individual focus.
The ones that invest only occasionally usually need more time until they take a final decision. Active and professionally operating business angels, on the other hand, make an average of about six deals a year and are therefore familiar with corporate law procedures. You can expect them to decide for or against an investment in the first three meetings – but they will give you valuable feedback in any case.
Before a meeting, find out in which areas they invested so far. Ideally, you can score extra points for your research and present your ‘fit’ with past career levels or investments of the angel investor.
Since private investors rarely make an official appearance because, unlike venture capital funds, they are not obliged to actively invest in startups, it is often challenging to find business angels. Ask your personal network or use professional databases that do the research for you and can actively find startup-investors. A targeted approach and research of the previous activities of the angel investor, but also a certain variety of available investors increases the probability of a personal meeting enormously. So be sure to stay focused, but with a systematic approach – a structured list will help you to keep the overview of potential investors.
Professional investors with large investment tickets: Venture Capital Funds
Venture capital (VC) is a subset of private equity, i.e. a special type of investment, in which the investment entered into by the investor is not tradable on regulated markets (stock exchanges). The difference in the term “Venture Capital” is therefore not clearly defined, but refers particularly to the private equity share, which consists of young companies that do not generate any sales or profits yet or are already positive in terms of sales or profits but require further capital for the scaling and growth phase.
As with angel investors, the strategic characteristics, the capital provided, the verticals and industries or the preferred stage of a venture capital company can be very different. Something that all VC companies have in common, however, is that they manage the capital of their respective investors. This has significant implications regarding the interests as compared to an angel investor. VC companies must regularly find and invest in exciting startups in order to actually let the investors’ money work. In the end, the goal of a VC company is to profitably sell the shares of the respective startup a few years later or even to work towards an IPO.
In which startups capital is invested in differs from VC to VC. Micro venture capital funds usually manage assets between 10 and 25 million € per fund and place tickets usually starting from 100,000 €. Micro venture capital firms generally require a share of the startup (instead of loans or convertibles) and often offer follow-on investments in the next financing round, provided that the startup shows an economical improvement and clear traction. However, the investment horizon is often shorter than that of traditional VC companies. Shares above 20% are rare, 8% to 10% of the company are more frequent. Due to lower investments compared to traditional VCs, micro venture capital funds often invest “earlier” in startups, i.e. in phases in which no or very low turnover may be achieved yet, but the basic product is already in place.
Classic VC funds usually manage larger sums of 50 to 300 million €. For early seed rounds, in case a VC company specializes in this stage, such funds usually invest between € 500,000 and € 2 million. Smaller investment sums are rather atypical: If VCs would invest smaller sums, their startup portfolio would quickly become confusingly large. Classic VCs mostly require company shares in the range of 15% to 20% in the “advanced” seed or series A phase. An investment is usually only considered to push the startup to the next growth phase and financing round.
Venture capital companies are professional investors. Therefore, they are very aware of the investment processes and usually have a very precise strategic focus. It is therefore essential that a founding team knows the exact investment focus before contacting those VCs, as a fit with the corresponding investment criteria of the fund is essential. The criteria can be diverse, but in any case, the founders should know the preferred vertical, the industry and the business model of the VC and in which stage, i.e. phase, the VC mostly invests. Intensive research is time-consuming but pays off when a contact is established. As with angel investors, specialized service providers can support you in your search for the perfect investors. In the end, it is like a personal job interview: certain previous knowledge about the respective venture capital company creates a positive impression and increases the chances of being invited to a personal meeting. If successful, VCs are often very quick and will usually decide for or against an investment after two to three meetings.
Find Startup Investors with professional Partners
Fundraising is a never-ending story. If you work in a startup, you quickly notice: there is always work to do. The search for capital is an additional, time-consuming effort for which there is hardly any capacity left over. But especially in the search for capital, a half-hearted approach is rarely crowned with success. It is important to proceed as efficiently as possible when approaching investors, to only address “the right” investors and to concentrate as far as possible on a personal approach.
In order to support this, matchmaking and data analytics services such as Capmatcher have been established to actively support and advise in the search for potential, suitable, relevant investors. While the founding team can continue to take care of the daily business, professional startup scouts and financing specialists examine the investor landscape and select the right candidates, without the founders having to give up any control. Capmatcher.com offers a specially developed digital startup form that asks for the most relevant investment criteria. The usage of the form, the manual creation of an individual exposé and the listing in the Capmatcher.Insights database, which is accessible by accredited investors only, is free of charge.