Starting a business can be both an exciting and daunting journey, often requiring significant financing to get the venture off the ground. In many cases, the capital required to launch your startup may exceed your personal capacity to invest. So to fill that gap, you’ll need to seek out external investors who believe in your vision and are willing to put their money where their mouth is. 

But what are the different types of investors available to help turn your business dream into a reality? Here, we delve into five different types of investors that new businesses and startups can approach - and offer practical advice for securing investment.

What is an investor?

An investor is an individual or entity that allocates capital with the expectation of a financial return. They are the fuel in the engine of business growth, providing the resources necessary for startups to scale, innovate, and penetrate markets. Investors come in various forms, each with a set of motivations, expectations, and contributions to a business’s journey.

Related: Accredited Investors vs Qualified Purchasers: What’s The Difference?

Style and risk tolerance of different types of investors

Some investors are conservative, opting for ventures with a clear path to profitability, while others embrace the high-risk, high-reward philosophy, often associated with startups and technology ventures. Understanding an investor's risk profile is crucial because it dictates how they make decisions, how much they’re willing to fund, and the timeline they expect a return. A misalignment here could lead to friction and strategic disagreements down the line.

Passive vs active investors

The dichotomy between passive and active investors further characterizes the investor spectrum. Passive investors place their trust in the operational team, preferring a hands-off approach, which is ideal for founders who seek more autonomy. They invest on the basis of performance metrics and forecasts, often through platforms or funds, and typically refrain from day-to-day involvement.

Conversely, active investors are hands-on and wish to be more engaged in the strategic decisions that shape the company. Their involvement can range from regular consulting and mentorship to holding a seat on the board of directors. This type of investor is prevalent among startups, where the need for guidance and industry connections is often as critical as the need for funding.

Read: How to find business investors

1. Banks: The traditional investor

Banks are often the first port of call for businesses seeking startup costs. Despite the increased scrutiny following the 2007 mortgage crisis, securing a bank loan is still a viable option. Pursuing this type of business investor requires presenting a comprehensive business plan and demonstrating financial responsibility. Some useful resources to explore for a deeper understanding of bank loans include the Small Business Administration (SBA) and established financial advisors.

The SBA offers various loan programs, such as the 7(a) loan program, Microloan program, and 504 loan program, each with its distinct advantages for different types of businesses. It's also crucial to understand the conditions attached to bank loans, such as potential collateral requirements and the need for an initial investment.

2. Angel investors: The passionate investor

Angel investors represent different types of investors from banks. They are typically affluent individuals who are passionate about supporting startups, particularly those facing challenges in accessing traditional forms of financing. 

When dealing with angel investor types, it's essential to clarify expectations upfront regarding control, their motivation for investing, industry experience, and specific requirements your startup needs to meet. This clarity sets a firm foundation for a mutually beneficial relationship.

3. Peer-to-peer lending: Directly connect with investor types

Peer-to-peer lending platforms provide a medium for entrepreneurs to connect directly with potential investors. These types of business investors require creating compelling online profiles showcasing your business' potential for success. What you get in return is access to alternative financing solutions that often come with more favorable interest rates compared to traditional banks. Notably, P2P lending does present higher default rates.

The P2P platform facilitates money transfers and monthly repayments. While some platforms automate the entire process, others offer a flexible arrangement where lenders and borrowers can negotiate terms, making P2P lending a versatile tool for both investors and borrowers.

4. Venture capitalists: Investors with a stake in your company

Venture capitalists (VCs) are types of investors who provide capital to startups with high growth potential in exchange for equity. However, VCs can be selective, often opting for startups with a solid business plan and proven measure of success. 

Remember, partnering with a VC means parting with a stake in your company, and possibly a say in management decisions. Therefore, having a comprehensive partnership agreement detailing each party's rights and expectations is advisable.

5. Personal investors: Investors you know

Often overlooked types of investors in startups, personal investors like friends and family are a valuable source of funding. However, navigating these waters can be tricky due to the close relationships involved. To secure funding from these investor types, it's necessary to establish clear boundaries, contractually defining the terms of the loan and other agreements.

6. Alternative financing options

While these different types of investors offer significant advantages, startups should also consider alternative financing options. Boopos experts can give you advice on how to aqcuire tailored funding solutions designed to cater to your specific business needs quickly and efficiently.

What qualities make a good investor

A good investor brings a trove of traits that foster growth and stability. Their strategic vision should sync with your company’s path to ensure that you’re moving closer to your shared objectives. You should also work with the types of investors who are open to providing mentorship and insights that are as valuable as their funds. Lastly, commitment to the long haul is essential. Seeking investment is not just about financial endurance but also about being an advocate for your business during its natural ebbs and flows.

What to avoid when selecting an investor

As you traverse the investor landscape, caution is vital. Some types of investors in business can be predatory, seeking to exploit inexperienced entrepreneurs. Avoid investors prone to litigation, those attempting to take over strategic decisions, and those without the actual capital to invest. Ensure that you perform due diligence on potential investors, looking into their track record, values, and management style.

How to choose the right types of investors

Selecting the right type of investors is like choosing a co-founder. Ultimately, their investment style, experience, and expectations should align with your company’s ethos and aspirations. Here’s a strategic approach to identifying the ideal types of investors for your business.

1. Assess Needs: Begin by clearly defining what your business needs from an investor beyond capital—be it industry connections, technical expertise, or market knowledge.
2. Profile Potential Investors: Research investors' past engagements to determine their alignment with your sector and their contribution to previous ventures.
3. Analyze Investment Patterns: Look for the types of investors in startups whose investment patterns align with your business stage and growth plans.
4. Review Track Records: Scrutinize the success and failures of investors’ prior involvements to gauge their potential impact on your business.
5. Evaluate Commitment Levels: Determine if the investor has a history of long-term relationships or prefers quick exits.
6. Align with Goals: Ensure potential investors’ goals harmonize with your long-term vision to foster a synergistic relationship moving forward.

Choosing the right types of investors in business is a critical process that can significantly influence your startup’s trajectory. It requires meticulous thought, thorough due diligence, and a strategic alignment of goals and expectations. By following the above steps, entrepreneurs can pave the way for a fruitful partnership that fuels growth and innovation.

Proactively seeking the right types of investors

Actively seek out types of business investors that align with your industry niche and business vision. Networking events and warm introductions are far more effective than cold calls or emails. Importantly, have a term sheet ready outlining investment terms favorable to your business before initiating discussions with potential investor types.

Whether you choose banks,venture capitalists, angel investors, peer-to-peer lending, personal investors, or innovative platforms, remember that the journey to securing investment is a learning experience. By understanding the different types of investors out there and being strategic in your approach, you can secure the right funding that will help launch your startup into success. Contact one of our experts today and get advice on you different funding options.