As a founder, if you're thinking about starting a business, the first thing that will come to mind is raising funds. Moreso, who could be the potential investor, how to raise money, how to approach them and what additional benefits that a founder can expect from such investors. The first step towards it is to know about investors who are the believers of new and disruptive ideas and are ready to fund the same.
There are different types of investors, each with its own agendas and goals. Hence, it becomes very important for founders to understand each such type of investor before start pitching to anyone. Here's a quick summary of the different types of investors and what do they look for while making an investment decision.
They are the individuals who look to invest in startups to get financial returns. Angel investors could be active investors or passive investors. Active investors actively contribute to the matters relating to startups in addition to making an investment. Passive investors simply invest in a startup to gat financial returns as and when an exit opportunity arises.
Unlike a venture capital firm, which invests the fund raised from others, angel investors invest their own money in a startup. Usually, angel investors prefer to play in a safe zone by investing in established businesses. However, they also invest in early-stage startups, depending on the business idea. They would look for a business idea with high profit potential but needs funding to grow.
Venture Capital Firms
Venture Capital Firms acts as an investing vehicle for people who look to invest in businesses with growth potential. They operate under a fund structure where money raised from a pool of investors is deployed in the businesses that are expected to have aggressive growth. The investment can be as venture capital or in many cases venture debt or convertible debt. In case of debt financing, they normally charge higher interest where there is an inherent risk in the business. They may also structure such return in the form of equity which becomes valuable when the business grows exponentially.
Venture Capital Firms operate on a pre decided exit strategy. They don't stay too long in a company and usually exit once the milestone of return on investment is achieved.
Strategic investors are usually corporations that invest in startups that are complementary to their own business. They are more interested in innovative ideas which help them to expand their existing business or creating a new category or market. Their objective is to nurture the startup, help them to grow and look at possible integration at a future date by a potential M&A.
Family offices are generally separate legal entities operating like a VC. While their core objective is to manage family fund by investing into financial assets and create wealth, they are increasingly looking at startups as an alternate asset class for investment. They normally do not act as a lead investor but opportunity to co-invest. Considering the objective is for financial return and growing wealth, they look at investing in matured startups rather than early-stage startups.
Corporate Venture Capital
A Corporate VC generally acts as an independent investment arm of a corporate. They have funds allocated by corporate for investing in startups. Their object is to identify and invest in startups which has synergies with the existing business of a corporate, either in terms of process / product improvement or reducing the cost, which would benefit the corporate. They also look at startups with a innovative ideas or business models which would help a corporate in creating a new product / business category and can benefit the company in long term.
Corporate VC is very common globally and companies like Intel, Google, etc are successfully running their CVC. Now Indian corporates are adopting the same model to be part of the Indian startup ecosystem. Unlike traditional VC firms, corporate VC looks for an opportunity to acquire equity stakes strategically and financially. They intend to partner with startups developing new technology, have innovative ideas or entering new markets which in turn benefits the corporate in terms of increases sales and profitability.
For each type of startup, there is a corresponding investor. Before approaching investors for the funding, startups should understand their stage of journey as an entrepreneur and the correct type of investors who will support them both in terms of funding as well as guidance which would propel the startup to a next trajectory. Understanding a right investor for your business is very critical and hence it is very important for a startup to pitch the business idea to the right investor.
We at 100X CVC are on a mission to drive innovation by connecting the brightest minds to corporations and providing broad range of startup portfolio.