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The Many Startup Investor Types and Who is Right for Your Deal?

There are many kinds of startup investors today. Venture Capital, MicroVC Funds, Corporate Venture funds, Family Offices,  Angels, High Net worth Individuals (HNI), and crowdfunders to name some of the current types  of investors.

Venture Capital- most startups think of venture capital when they start their fundraise. The reality is that venture capital is only for a small number of startups. VCs draw their funds from outside sources called LPs or Limited Partners. The VC charges a management fee and a carry (share of the profits) from the funds raised.

There are VCs who still raise the funds in what is called committed capital- the funds are committed by the LPs. Newer VC funds are often called “Pledge funds” in which the LPs pay the management fee for access to the deal flow but they review each deal before funding and have a say in the funding process.

For some VCs you may notice the turnaround time on questions and deal flow takes longer. For pledge funds, the VCs must gain the approval of the LPs to move forward- hence the turnaround time is longer.

VCs fund only the top 10% of all qualified startups. They look for high growth, large target markets with scalable business models.

MicroVCs are venture capitals funds with less than $100M in funding. Typically, MicroVCs start with $25M to $50M funds and then deploy the funds to 10-12 companies. They often have very specific investment criteria since the management fee on the fund doesn’t add up to much and one needs to keep the costs low on such a fund.

Corporate VCs are often called strategic investors in that they invest for strategic reasons rather than financial. They seek new technologies, talent, and other tools to help grow their business. They often invest as follow on investors and typically do not lead the fundraise for startups. In the past some firms had a strategic fund, but today just about every company has a fund for startup investment.

Family offices are investors based around a family partnership that allocates some of their funds to startup investing. Some family offices go it alone and are called single family offices while others band together into groups and are called multi-family offices that share the deal flow and due diligence. For every venture capital fund in the US, there are five family offices. They are less prominent since they invest privately and provide very little publicity around their work.

Angels are individuals that meet the SEC accredited investor requirement. That means they have $1M in net worth not counting the house they live in. Angels invest their own money. Some band together into groups to share the deal flow and the due diligence.

Sometimes the group is formed around the “dinner club” model and a formal application process is used to recruit the deals. Others form syndicates in which a deal that is led is shopped to others in the group. The dinner club model can be a heavy time sync since most of the meetings are in person and only occur at specific times of the year. The Syndicate model is lighter and focuses on deals that have a lead.

Angels look for the same thing as VCs but often invest outside those parameters since it’s their own funds.  They often invest in things that matter to them personally such as impact funds.

High Net Worth Individuals are similar to angels but typically have more investing experience. They most often invest their own funds and in areas they understand well.Some HNIs band together in informal syndicates to share the deal flow and due diligence.

Crowdfunders are either accredited or unaccredited investors seeking to make a return by investing with a large number of other investors in startup deals. Because their investment size ranges from $100 to $5000 in most cases, the startup needs a large number of them to complete a round. Crowdfunders more than any other investor make their investment decision on factors other than financial return. They often invest to support family and friends, or businesses they care about in some manner. 

Hall T. MartinHall T. Martin is the founder of TEN Capital and a builder of entrepreneur ecosystems by startup funding through angel networks, funding portals, syndicates, and more. Connect with him about fundraising, business growth, and emerging technologies

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