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5 Types of Startup Investors to Know
Angel investors play an important role in the success of startups, entrepreneurs, and small businesses alike. But angel investors aren't the only type of individuals investing in startups.
As young companies, startups often need funding to successfully launch and sustain their growing business. While the founders of startups may invest their own money, outside investors provide additional funding that is vital to these new business ventures.
Becoming an angel investor or other type of startup investor may be a lucrative endeavor, but before you start, it's important to familiarize yourself with different ways to invest:
- Angel investors
- Peer-to-peer lenders
- Venture capitalists
- Personal investors
Here, we'll detail each type of startup investor, discuss how angel investors are increasingly coming together to form angel investor groups, and what that means for your investment future.
No. 1: Angel Investors
Angel investors are high net-worth individuals who provide financial backing to startups, entrepreneurs, or small businesses.
These types of startup investors tend to be successful entrepreneurs, business professionals, or corporate leaders who want to use to their wealth to invest in something they believe in – especially startups that may have difficulty gaining financial backing otherwise.
The typical amount for an angel investment can vary greatly. In some cases, angel investors invest $100,000 or more. If you aren't ready to invest that much, you can still be an angel investor with a platform like the Angels & Entrepreneurs Network, which allows you to invest for less money than traditional angel investing.
Considerations: Despite some risk, angel investors are attracted to startups because they can yield high returns when they are successful. Many angel investors diversify their portfolio by adding multiple deals to increase the likelihood they will yield a good return on their investment.
Sometimes it requires patience to see big financial returns, but angel investing can also be a rewarding experience for those who enjoy helping and mentoring entrepreneurs.
No. 2: Peer-to-Peer Lenders
Another type of startup investor is a peep-to-peer (P2P) lender. P2P lending – also known as crowd or social lending – allows individuals to obtain loans directly from other individuals, without involving a financial institution.
Borrowers can connect with lenders directly via P2P lending websites. And although
P2P lending is relatively new, the lending system has become increasingly popular with P2P lenders like Funding Circle, Payoff, LendingClub, and Upstart leading the way.
Considerations: Like all investing, P2P lending comes with risks. Because these loans are made to individuals, there is a risk of default and loans are often unsecured.
Investors considering joining a P2P lending platform have the choice of which loans they fund. Investors who are more risk-averse can choose to fund lower-interest loans, which offer smaller returns but are more likely to be paid on time. Those willing to take a bigger risk for greater returns can choose higher-interest loans, which are given to borrowers with lower credit. As with most investing, diversifying with high- and low-rate loans can mitigate risk while potentially bringing in big returns.
No. 3: Venture Capitalists
Angel investors and venture capitalists are often confused. While both are types of startup investors who provide financial backing, the method and details for funding differs.
Venture capitalists typically invest millions of dollars in startups, entrepreneurs, and small businesses by securing a share in the company. This is known as equity capital.
This is done with the assumption that the equity capital will increase, and the venture capitalist will receive a positive return on their investment.
Venture capitalists typically avoid investing in high-risk startups, opting to invest in startups, entrepreneurs, and small businesses with solid business plans and the potential for exponential growth.
Considerations: Breaking into a venture capital firm can be difficult, even if you have relevant experience. Most individuals who join venture capital firms have founded successful startups themselves, have advanced analytical skills, and a large entrepreneurial network.
No. 4: Personal Investors
Another type of startup investor is a personal investor. Startups, entrepreneurs, and small businesses sometimes turn to family or friends for financial backing.
While it's illegal for startups to accept funding from an investor unless they are accreted, there is an exemption that allows investments from family and friends. Despite this exemption, there are still strict limitations on how many personal investors a startup can have.
Considerations: Those who are considering being a personal investor in a startup should be mindful of laws surrounding accredited and unaccredited lending.
In any case, investing money in a startup owned by a family member or friend should be thoroughly documented.
No matter how close you are to the founders on a personal level, it is important to make sure all investments are recorded and all deals are signed on paper.
No. 5: Crowdfunding
While some might not consider it a type of startup investor, it's impossible to overlook how much money is generated through crowdfunding.
According to Fundera crowdfunding statistics, $17.2 billion is generated through crowdfunding in North America every year. In 2019 alone, there were nearly 6.5 million crowdfunding campaigns worldwide.
With crowdfunding, startups rely heavily on donations from both personal and professional networks. The success of crowdfunding efforts is often bolstered by a savvy marketing strategy and social media amplification.
Considerations: Crowdfunding is typically donation or product-based (if the startup sells physical goods), but some startups are leaning into equity crowdfunding.
With equity crowdfunding, startups offer a stake in the company in return for funding. If you are looking to make a potential return on your investment, look for startups offering equity crowdfunding.
What Are Angel Investor Groups?
This type of angel investor believes collaboration is key.
For those who may not be connected to a founding member of a startup or have access to quality deals, angel investor groups are a compelling option.
Angel investor groups come together to evaluate and invest in startups. These groups typically contain 100 to 200 members and are often organized by geographic region.
Angel investing groups may offer several benefits to those looking to become an angel investor. In addition to having access to more angel investment opportunities, angel investing groups can lower your overall investing risk since you do not have to invest as much as you would in an individual setting.
These groups allow angel investors to improve due diligence when evaluating startup companies to invest in. This ultimately helps the group make more meaningful investments.
Learn Even More About Angel Investing
We've covered the different types of startup investors and angel investor groups, but view the rest of our guide if you'd like to learn more about angel investing.
You can learn how to become an angel investor and read about the characteristics successful angel investors have.