Basics of stock market 2: Understanding the types of investors for a business or startup
Investors are crucial people who come into your start-up journey to give you a boost. They don’t just provide financial help; their valuable advice and knowledge are of at most importance. The level and quality of their involvement can ultimately determine your company’s success or failure. Most start-up people depend on investors for funding their new business. If there aren’t any funds to grow and expand your business, then you wouldn’t make it far.
It doesn’t matter if your company is introducing a new product, providing service, or expanding operations, the investor’s capital can offer valuable support for your company. It is good for upcoming entrepreneurs to learn about the types of investors they will be facing throughout their journey.
Let’s explore the 5 types of investors you might want to consider in your journey to becoming your own boss!
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Most people like you and me will most probably tell your idea to your close friends, family, relatives first. Some of them will surely like your idea and will come forward to invest in your idea. They are the people who come in the very early stages of your business. Thus, the name personal, the people whom you know personally coming to invest.
Even though this is a good way of raising funds, there can be complications when you borrow large sums. There will be heavy documentation required for which they can be taxed as well. They should also sign a document acknowledging the risk and clarifying that they may not be getting their money back. You might need to consult a lawyer before proceeding with this.
Also, there is a limitation on how many of these people can invest in your company because of legal regulations and limitations. It's illegal to take money from your investors for your business unless the investor is accredited. Our law determines accredited status based on investor status and personal wealth. Additionally, he must have an annual income ($250,000 of annual earnings for three years) or personal net worth ($1 million) above a minimum limit.
But even though this is the rule, even unaccredited family members can invest money in your business, but there is a strict limit to this. Limited to the number of unaccredited investors.
But after all this, there is a potential limit to how much a personal investor can pump into your business. After all, he is taking money from his personal savings.
These are common people like you and me. But they come in the form of Angel as the name suggests. They come in the very early stages, right after you get some funding from personal investors. This is the most common term of investor which people have heard of, obviously because of the word ANGEL.
They usually make a one-time funding or ongoing funding. They might also be one of your family members. Their aim is to open the business, mostly doesn’t look at the viability of the business. Thus, they always focus on helping the start-up grow in the initial stages rather than profiting out from the business.
Angel investors are known with various names like business angels, seed investors, private investors, angel funders, or information investors. These investors must have an income ($200,000 annually) or net worth ($1 million) above a minimum limit.
Venture Capitalist (VC)
This is the next level of investors. They usually see businesses that have shown significant growth and revenue. These investors are notable and invest a large amount in the range of millions of dollars.
They study the business in detail, see their business model, evaluate their finding, look for long-term growth and if they are satisfied with what they got, then only they will go forward. They are always looking for profit-making companies mostly taking a part of the business in terms of equity or percentage interest or royalties.