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!
Table of contents
Personal Investors
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.
Angel Investors
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.
This is beneficial if you want a lot of capital along with long-term experience and knowledge, then these people are the right ones. A large chunk of the business is built, produced, and sold to some investors via independent limited partnership.
Peer-to-Peer Lenders
Peer-to-Peer lending is the practice of lending money to individuals or businesses through online services that match lenders with borrowers. They usually provide their service online and try to reduce the overhead cost, providing the service more cheaply than the traditional method. By this, the lenders can earn higher returns, while borrowers can borrow at lower interest rates. There might be defaulter risk on the loans if the borrower fails to repay the loan in time.
These are individuals or companies that offer to fund small businesses. Here the entrepreneur must apply through an online portal or offline explaining why he wants funding. These groups which are particularly small organizations will evaluate your business and see if they wish to support you.
In India, Peer-to-Peer lending is regulated by the reserve bank of India. It has published a consultation paper on the regulation of P2P lending and there are 19 peer-to-peer lending platforms in India as of 2019 where the RBI has granted a license. However, peer-to-peer lending platforms in India are helping a huge section of businesses who have previously been rejected or have failed to qualify for a bank loan.
Bank loan
Banks are the classic examples of business loans. But here, you need to provide a lot of documents and proof of collateral or a revenue stream before your loan application gets approved. Because of its systematic approach, many businesses opt for this.
One drawback will be that the high interest rates banks offer. Banks use multiple factors to calculate the loan amount eligibility of their borrowers. Services offered under business banking include loans, credit, savings accounts, and checking accounts, all of which are tailored specifically to the business.
Banks provide financial and advisory services to small and medium businesses as well as larger corporations. These services are tailored to the specific needs of each business. Banks may also offer asset management and securities to their corporate and business clients.
Final Verdict
Getting the right investor is a lot more difficult and you should never only think about the capital you will be getting. This also requires a certain level of commitment from your side. You need to make a list of what your expectations are before you can approach any investors. These investors might be the guiding people for the future growth of your business.
Now, you have your fundings from these investors. What now? Well, you will start implementing your funds in various places and services thereby expanding your business. You may start thinking about going from local to global, domestic to international, customers to clients. Whatever you're doing, you have high hopes and high spirits to bring your business to the best.
Why go public
Don’t forget the fact that you will be having a competition on your way which makes you work harder each day. It’s been years and now you want some huge investments, and you want the whole nation to know about your business. Let people know that you’re there in the business world and get people’s trust. Getting the trust by getting investments from us ordinary people. One way to achieve this is for the company to go public. What might be the additional benefits for the company going public? Let’s find an answer to this question in the next article.
Stay tuned!