Starting a new business is a daunting task, and arguably the most intimidating part of getting a project off the ground is finding money to help the company grow.

Anyone can have a good idea, but finding investors to consider backing you and shelling out money to bring your company to the next level is something that few can pull off.

What’s It Gonna Take?

Before approaching potential investors, you need to understand your capital requirements. In simple terms, how much money you’re going to need to achieve your goal?

Knowing your business well enough entails basic knowledge of your method of production or procurement, as well as how you plan to sell your products, and of course your operating costs.

These might be easy to calculate if you have completed an online business analytics masters or your business is already profitable but will take time to understand if you’re starting a new company.

Knowing the investment horizon, or how long the investment will take to produce a return, is another important factor that investors consider.

Investments in a newer business normally have a longer investment horizon, since they’re just getting off the ground, while investments in established businesses may produce a return more rapidly, given their proven ability to execute and deliver finished products.

These factors dictate sources of funding available to you, and that source of funding will affect how you approach raising money and selling equity.

There are different types of investors in businesses and they normally select when and how much to invest based on their structure, the resources they bring to the table, and how quickly they expect a return on investment.

Seed Round

Most businesses begin with some investment from the owner. This is sometimes referred to as “pre-seed” funding. It’s often the only investment that smaller businesses will require, or even have available to them.

Businesses with a promising business model or founding team may attract additional investors for what’s known as a seed round. Investors in the seed round are usually willing to take big risks at an early stage of the company, and most are accepting of a long investment horizon.

Angel Investor

An angel investor is someone who invests in a company, usually very early on, often because they believe in the founder and their mission/product.

They usually assume the most risk when investing, due to their early involvement and the inability of most companies to realistically demonstrate their ability to reach profitability at an early stage.

Angel investors normally get involved when the product is just an idea, or in the early stages of development, to finance the development of a prototype or minimum viable product (MVP) and help establish the basic operational needs of the company.

They often provide a business’s first investment, known as its seed capital, and may take an active role at the earliest stages of company formation, but are generally passive investors and are rarely directly involved in the operation of the business.

Incubators

Incubators are an alternative or supplement to angel investors. Incubators are companies that specialize in mentoring the founders of promising early-stage companies. They help founders get their company off the ground and prepare for success as a medium-sized or small company.

Incubators usually get involved early on and often provide a company with seed money.

Unlike angels, incubators take a more active role in the company’s growth.

Their primary method of adding value to a new company is providing other resources: office space, management training, consultants with technical know-how, connections with reliable business service providers and suppliers, and help in hiring a team that can deliver a finished product.

Incubators usually invest in companies that plan on becoming publicly traded. Most want to take on companies that have a business plan, but some may be willing to take on credible technical founders with nothing more than an idea.

Family Offices

Family offices are another source of early-stage capital. A family office is a private wealth management firm that manages the investments of wealthy families.

They often have access to larger volumes of capital but take a more hands-off approach.

Family offices are usually more conservative in their investment strategies as compared to angel investors or venture capital firms and may be more likely to participate in later funding rounds, or to invest in businesses through venture capital firms or private equity funds.

Series Funding

Companies that show promise and the ability to become extremely profitable will normally conduct multiple rounds of funding.

After obtaining Seed funding and beginning to grow, companies that require additional funding to scale up their operations or want to expand into new markets will engage in series funding. This involves anywhere from three to ten rounds of funding, although normally not more than four.

The benefits of series funding can be massive, especially for companies with a large addressable market that require large amounts of capital to produce goods or provide services at the scale required for optimum profitability.

It usually involves diluting the shares of founders and existing investors, which may or may not be desirable, and will ultimately fall on the founders and board members, if there are any, to decide.

Accelerators

Often conflated with incubators, accelerators are frequent participants in early rounds of series funding.

They are generally very competitive investment programs, accepting few applicants, and with good reason: they often have the task of helping a promising company with little experience find product/market fit and reach a scale of production or deployment necessary to become viable.

Accelerators often take on companies that have a promising prototype or minimum viable product and help their business mature into a company that can sell a polished product at scale.

Like incubators, accelerators provide access to important resources, but accelerators aren’t interested in providing office space, coaching on basic business skills, or helping companies buy laptops at a discount.

They focus on helping founding teams get a finished product to market, which is crucial when finding investors.

Accelerators aim to position companies for growth by ensuring they are ready to attract the right investors with a viable, market-ready product.

Venture Capital Firms

Venture capital firms, or VCs, are pure investment firms that are mostly concerned with injecting large volumes of capital into promising businesses.

While not normally quite as hands-on as accelerators or incubators, they still take an active role in a business.

While some VCs may get involved as early as a Series A round, most prefer to lead later rounds of investment after a product has been bought to market.

VCs normally attempt to secure large quantities of equity, and will often request a seat on the company board to provide high-level guidance.

IPO

The final stage for securing investment capital is the launch of an initial public offering (IPO). IPO is the launch event for a company as it becomes an entity that is publicly traded on the stock markets.

It’s an exciting time for companies – this is when many startups feel they have “made it.”

Many founders and early-stage investors – especially VCs – choose to cash out some of their shares at this stage, although ambitious founders may want to retain as much control as possible to ensure that they can continue to execute plans according to their vision.

IPOs are usually the time when a company will raise the most money at once and begin operating at the largest scale possible, often prompting major changes in the structure of the company.

Institutional investors are often the primary investors in IPOs. These large investment firms typically control vast sums of capital on behalf of large groups of passive investors.

They seek to hold substantial portions of large publicly traded companies, usually with a medium-term or long investment horizon. Different types of institutional investors have different goals and thus pursue different strategies.

Hedge funds, for example, are large partnerships of private investors that make large investments that have the potential to grow dramatically, while endowments and index or pension funds usually have heavily diversified portfolios backed by large amounts of money for long–term investors.

IPOs are also great opportunities for retail investors to make a splash.

Retail investors are a diverse group with different goals who fall into many different categories, but they all share one thing in common: they want to understand the market and believe they have the knowledge and ability necessary to beat the market.

When finding investors, it’s crucial to recognize that retail investors are motivated by a strong belief in their own market insights and strategies.

Acquisition

While many startups fail, some simply never reach profitability, and others can’t return capital fast enough to satisfy the terms of their investors.

In these situations, companies that still have promising assets, technology, or value to offer but can’t sustain themselves will seek to be acquired.

The acquisition isn’t necessarily the end of the line – sometimes the founders continue to lead the company. Some companies still go on to IPO or varying degrees of success as private entities.

Corporate investors are a major source of capital for startups, but many choose to wait until they can acquire a controlling stake.

While corporations often only choose to invest in companies they plan on acquiring, they may make exceptions for businesses that are part of their vertical or supply chain they will benefit from having close relationships with but don’t produce sufficient margins to meet the expectations of corporate investors.

Sometimes a corporation simply subsumes a smaller company as a part of a larger conglomerate or holding company.

Finding Investors: Tailoring Your Pitch to Different Stages and Investment Goals

There’s no shortage of ways for businesses to raise capital, whatever stage of development they are in.

Appealing to each of these types of investors might mean dramatically different things depending on what stage your company is in and what your long-term goals are.

There are people all over the world with different investment goals and strategies, but at the end of the day, they all want to make money, and they may be interested in your business someday.