Every day, we hear about startups reaching new milestones, hiring employees, launching products, or upgrading processes. But to achieve all this, one key driver is essential: MONEY.
Let’s explore the types of startup investors.
Raveena and Sumit are cofounders of XYZ Tech Company, with Raveena holding 68% of the company’s stake and Sumit holding the rest. Now, they want to raise capital to kickstart their services.
Let’s follow their journey step by step.
Bootstrap:
In the early days of the startup, Raveena and Sumit decided to bootstrap. Bootstrapping means the founders use their own savings to fuel business growth. This gives them full ownership without external involvement. Bootstrapping can lead to significant growth if the business has strong profit margins, but it requires patience, time, and consistent effort over many years. Raveena and Sumit used their savings to set up a website and cover operational costs. Now, they need new investment to continue expanding.
Friends and Family:
This category includes non-accredited investors—essentially friends, family, and close acquaintances who believe in your idea. Since you have a personal connection, repayment terms are often more flexible. However, if things go wrong and the loan isn’t repaid, it could damage relationships. Raveena and Sumit took a loan from their college principal at a set interest rate.
Banks:
Banks are an excellent option for getting investment without diluting ownership. Loans are granted based on profits, assets, and earnings. If you pay the loan on time with interest, it improves your credit score, which can make securing future investments easier. Banks also offer business credit cards that come with rewards. Raveena and Sumit used government schemes like “Standup India.” In India, this scheme provides loans ranging from ₹10 Lakh to ₹1 crore, only if the major stakeholder is a woman with at least 51% ownership. Raveena, as the major stakeholder, secured a loan under this scheme from a trusted bank.
Angel Investors:
When Raveena and Sumit wanted to raise a seed round, they turned to angel investors. Angel investors are wealthy individuals, often with entrepreneurial experience, who invest capital in exchange for equity. This is a high-risk, high-reward model. For example, Anupam Mittal was an early angel investor in Ola, which is now valued at $7 billion. Angel investors not only provide capital but also offer mentorship, access to networks, and valuable insights. Raveena and Sumit secured their first angel investment and were able to grow further.
Venture Capitalists:
As XYZ Tech Company grew, Raveena and Sumit needed significant capital to expand, so they turned to Venture Capitalists (VCs). VCs provide large investments, usually starting from ₹20 crore, and aim for long-term returns. They often look for “home runs,” meaning one of their investments needs to generate massive returns to cover any losses from other investments. Venture funds typically seek returns after 8-10 years and operate in three phases:
- Initial Phase (1-3 years): VCs identify promising companies and invest in them.
- Growth Phase: VCs deploy capital, offer support, and guide the company towards growth.
- Exit Phase: The company goes public or has a successful exit, generating returns.
VCs are structured with Limited Partners (LPs) at the top, who provide the capital, and General Partners (GPs) who make investment decisions. Although VCs helped XYZ Tech go public with a happy exit, not all VC investments succeed—75% of venture-backed companies never return cash to investors, according to Harvard Business School Senior Lecturer Shikhar Ghosh.
Incubators:
Incubators aim to connect founders with the right mentors. They come in various sizes with different investment capacities. Y Combinator is one of the most well-known incubators, with an acceptance rate of less than 3%. Incubators provide office space, mentorship, and connections within the ecosystem. Although Raveena and Sumit didn’t use this option, incubators are an excellent way to start if you lack personal capital but have a brilliant idea and solid business model. They often invest a small amount of money in exchange for equity to help you get started.
Conclusion:
If you want to start your entrepreneurial journey, then this is your roadmap to grab your timely investments and boost company’s growth. Its not just grabbing investments, but getting right investors with aligning interests on board is really important as it helps you to channel your energy and resources towards growth. Like Raveena and Sumit, focus on building a strong foundation, bringing on the right partners, and eventually, taking your company to new heights.
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