The knowledge necessary to make good match between startup needs and the right type of an investor is usually a nuisance for beginners. However, the number of options startups have is constantly growing. Nowadays, it is often like choosing the right wine in a store piled with bottles. It is even more difficult when you realize that choosing the right investor varies depending on a country where you start your business. In Poland the approach is different than, for instance, in the US. Part 1 of this article focuses on the situation outside Poland and describes a few tips on how to choose your investor well there.
Choosing the best type of investor is not just about assessing their business offer, and picking the best. The list below describes pros and cons of cooperating with Angel Investors, Public Funding Agencies, Venture Capitalists, Strategic Investors, Banks, Accelarator Programs and more, and applies to the model situation outside Poland.
1. Angel investors– specialise in high risk investment at early stage ventures
- Pros: personal experience with similar startups, superior knowledge. Offer advice, are patient and understanding since they’ve been there. Have a lot of valuable contacts.
- Cons: limited capital comparing to other investors, require a high return on investment
2. Public funding agencies– specialise in early development stages. Aim to achieve specific public policy objectives by governamental entities
- Pros: valuable introductions, credibility, marketing and R&D facilities, often reliable and provide long-term cooperation
- Cons: get involved to achieve policy goals, which may clash with the founder’s ultimate goal. Lack of passion, empathy or appreciation of the founders’ work and innovation. Co-operation needs patience. They don’t provide advice or mentorship. The cooperation may come with many conditions and restrictions.
3. Venture capitalists – specialise in investing in high risk ventures that offer potentially high returns. They raise funds to capitalize investment funds. Link between specific investing opportunities and investors.
- Pros: very valuable for startups at series A stage in need for launching commercial activities. They often have good knowledge, technical background and a skill to identify new technologies with the potential to generate high returns.
- Cons: they typically lack in entrepreneurial experience. Some Venture Capitalist are actually Vulture Capitalists, that invest in desperate startups heading towards failure. They do it in order to ambush at some point and finally take over the business and develop it by their own means.
4. Strategic investors – they invest in order to fullfill a strategic agenda. Every mentioned type of investor can be a strategic investor. They usually work for large companies that invest in the same or complementary industries in order to enter a market.
- Pros: most valuable type of investor. They provide the best possible advice and other non-financial benefits comparing to the others. Invest for a strategic rather than financial reason, which may bring wiser and more patient cooperation
- Cons: they don’t invest in early stage starups unless it is a part of their strategy.
5. Banks – they invest mostly in businesses that have reached full development. They also invest in early stage startups that offer banking products.
- Pros: they offer long term banking relationships, many unknown but valuable funding products, banks can offer support through product management match equity programmes.
- Cons: as strange as it can get, the amount of capital provided by banks can be a problem
6. Accelerator programs – provide tangibles like funding, mentoring and access to numerous investors. They provide a mixture of important values, however, the amount of financing varies. Companies can receive some funding to get started but the most improtant aspect are the networking possibilities accelerators may offer.
- Pros: a huge amount of knowledge, the “network effect” – increases motivation and future opportunities.
- Cons: aligning business needs with the needs of an accelerator, some companies may not like the spirit of competition inside
7. 3xF rule – Family, Friends and Fools 🙂
- Pros: hmm…
- Cons: don’t make me write all of them
The six (OK, seven) common types of investors function best outside Poland. The second part of this article is going to present the Polish environment, the differences and the best possibilities that startupers have in our country.
Article based on : Shelters D., The Startup Guide For The Technopreneur, 2013, copyright by Wiley