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The types of venture investors

What is an investor?

An investor is a person or an institutional group of people who provides money to your company in order to make profits themselves.  

 

For financial participation in your startup, an investor usually has the following options: 

1. The investor provides you with a loan: This means you receive money from your investor, which you have to pay back in the future at a certain interest rate. 

2. The investor participates in the equity capital of your company and thus receives shares of your company:

Through this participation, the investor becomes a co-owner of your startup and therefore also profits from your positive business performance. Equity providers usually have a say and often bring their own know-how into your company.

3. The investor invests in your company by means of a convertible loan:

This form of financing describes the short-term extension of a loan to your start-up, which is converted into equity capital over time. 

Therefore, the convertible loan is an interesting hybrid between equity and debt capital, which can be especially attractive for companies in the seed phase. If your startup can pay off the investor, he will also pay you back his loan with interest. 

 

The use of capital for company shares is often referred to as venture capital. In contrast to the financing option using debt capital (which incurs interest, fees, etc.), there is no debt relationship between the investor and your company beyond the exchange of capital for shares. 

 

However, the investor’s obligatory right to have a say in company matters must be taken into account, which should definitely be factored into the management of your startup. 

The different types of investors

In order to systematize future investors more precisely, you should know about their different functional structures and business models.  

 

The investor types relevant for your start-up can be divided into Business Angels (BA), Venture Capitalists (VC), Family Offices and Institutional Investors.

1. What are a Business Angel (BA)?

Business Angels are usually private individuals who once built up a company themselves and now want to put their private money into exciting business ideas.  

 

Consequently, they bring a certain know-how in business management with them and usually want to participate in your startup outside of financial support. 

  

A Business Angel can therefore perhaps be compared to a “second-hand goods dealer”: He wants to actively support your company and also “take many matters and decisions into his own hands”.  

 

The typical characteristics of a BA investment are therefore, in addition to their capital investment in your start-up, also their active support as well as the consulting of your startup. 
 

In addition to the purely financial investment, the business angel also acts as a coach or business coach for your company. 

 

But be careful: The right of co-determination of your business angel in important decisions of your company can, besides profiting from his business expertise and company experience, also lead to disputes in the design of your start-up.   

 

An investment by a Business Angel can be made at a very early stage of your company and is financially on a smaller scale.  

 

Business Angels usually become active with their investments shortly after or during the foundation, i.e. in a phase that is associated with a high dynamic in your young company.  

 

This also shows the essential difference to a venture capital investment, which often only takes place in a later phase and then only consists of a purely financial, but often larger investment. 

Business Angels often accompany you on your initial path from start-up to scale-up.  

 

Ticket sizes of 50,000 to 500,000 euros are common, whereby the investment exit is usually targeted after 5 years.  

 

Since the value creation of your company affects the active profit of the Business Angel, he is primarily interested in the growth of your start-up as well as in as much equity capital as possible. 

 

Investing in your startup – which is in the early stages – is also very risky for the Business Angel. Therefore, the BA usually demands a very high return on investment (ROI) in return for his commitment. 

 

Business Angels are additionally aware that a high percentage of their investment is completely lost if the companies they select fail. Therefore, they try to find companies that show a clear potential to increase their initial investment tenfold within five years.  

 

However, due to the high risk and high percentage of lost capital, your Business Angel’s internal rate of return on a successful portfolio here can rise to around 20 to 30 percent.  

 

Despite this high interest rate, the Business Angel investment is profitable and sustainably attractive for your startup, since less expensive sources of capital such as financing through conventional bank loans are not accessible for your startup in the founding phase. 

 

But how widespread is financial support through the business angel business model?  

There are around three million Business Angels in the USA.  

 

In 2020, there are estimated to be around 10,000 business angels in Germany, with an upward trend.  

Overall, however, it can be stated that business angel investments in Germany are relatively below average in international comparison.  

 

In addition, Business Angels are often organized in networks. They serve as a contact point for companies seeking capital and put them in touch with suitable business angels. It is usually not the decision of a single person whether your start-up receives funding.  

 

The following documents are therefore a prerequisite for a promising business angel contact: Teaser Pitch, Verbal Pitch, Full Pitch as well as Financial and Legal Overview.

2. What are Venture Capitalists (VC)?

Venture Capitalists are investors whose business is to strategically reinvest money invested in your company and then resell their holdings – with a corresponding increase in value.  

 

Their professionalism allows venture capitalists to invest between 500,000 and 1 million euros in your company.  

 

Thus, the venture capitalist – VC for short – is a suitable companion for your already advanced startup or scaleup. Among other things, VCs require for their investment that your company can show a quite consistent annual turnover. 

 

Unlike the Business Angel, the VC has little interest in actively supporting your start-up or further developing your product. Accordingly, he also grants you greater freedom of decision in your company management and the further design of your start-up or scale-up. 

 

A Venture Capitalist will always finance your advanced startup or scaleup and its respective entrepreneurs in the knowledge that your company may fail and that he will lose his invested money. Therefore, Venture Capitalists choose their investments accordingly with caution and various risk considerations. 

 

The relationship between the Venture Capitalist and you, the company founder, is also governed by a number of special contractual elements.  

 

These limit your room for manoeuvre, but also that of the VC (for example with regard to the protection of the intellectual property of the company founder) at particularly critical points.  

 

The financial support of your VC usually includes so-called phased financing plans.  

Accordingly, your growth company will only be provided with additional funds if certain development stages agreed in advance have been reached by your start-up.  

 

The commitment of venture capital companies is therefore often limited to certain development phases of a company and during this time focused on achieving maximum value growth.  

 

Finally, a suitable structuring of the exit from the investment is of great importance for the VC, because the sales proceeds that can be achieved upon exit represent its most important earnings component.  

 

The most attractive option from the VC’s point of view is the so-called IPO (Initial Public Offering), i.e. going public.  

Other exit channels are the sale of the investment to another company with strategic interests (trade sale), the sale to one or more other venture capital companies (secondary purchase) or the buy-back by your own company (company buy-back). 

The exit of a VC is usually sought after 10 years. 

3. What are Family Offices?

A family office refers to a company whose purpose is to manage the large private assets of a family of owners.  In principle, however, the tasks of a family office are not limited.  

 

In addition to pure asset management, it often also provides other classic secretarial services such as mediation, accounting, office organisation, travel planning, security management, controlling etc. 

 

Since family offices are usually only interested in pure growth capital for your company, they invest almost exclusively in already advanced scale-ups.  

 

Ticket sizes of around 5-35 million euros are considered appropriate. An investment exit is usually targeted after about 15 years. 

 

Furthermore, the business model of a family office can basically be divided into two categories: 

1. Strategic investments in technology-driven scale-ups: This is where family offices can be located that are looking for well-placed new technology-driven innovations whose existence either represents a decisive influencing factor on their own market value (eliminating competition) or can be profitably integrated into their own company. (Example: the invention of a “flying car” would be very  interesting for big car brands). 

2. Strategic investments in non-technology driven concepts: This is where family offices can be located that want to buy into the already well-run concept of your advanced scale-up. Well-known examples of innovative concepts that have been bought by a family office are Airbnb (a kind of rental concept of private real estate to private customers) or Uber (an automotive passenger transport concept via app and online payment).

4. What are Institutional Investors?

Institutional investors are banks or state investments that are usually financed by a public authority in order to support young entrepreneurs regionally.  

 

Since they are limited to a certain area and usually favor a rather socially oriented selection process, they are comparatively less relevant for your start-up. 

Before you should approach / contact an investor ...

Your start-up is beginning to develop and you have elaborated great visions and promising concepts for your company. Ideally, you would like to get started right away and approach suitable investors …   

 

But when is the right time to contact an investor? In fact, your start-up should first have some “essentials” before you start contacting them. 

The preferences of investors

First of all, it is important to select the investors you are interested in by means of a smart screening process. It is important to keep in mind that investors usually stick to the preferences of their own industries.  

 

So, it does not turn out to be beneficial to contact them outside their familiar segments.  

 

Investor preferences are based on their individual industry focus as well as start-up maturity and ticket size of the investment. You should also differentiate your prospective investors’ preferences in terms of their B2B or B2C contact circuits: 

  1. B2B contact circuit: B2B is the abbreviation for “business-to-business” and expresses the business relationship between two companies. With a B2B company, you’re also specializing in a particular target audience.  Realize that it makes a big difference whether you’re trying to attract an individual or a business customer. You can get in touch with investors who prefer B2B contact via social networks such as LinkedIn or Facebook. 

  2. B2C Contact switching: In distinction to the term B2B, B2C companies are defined by the fact that their clientele consists of end consumers and that they focus on the sale of services or products to private individuals. With a B2C company you address a larger target group than with B2B, but the turnover per customer or per purchase is usually lower than in B2B. At the same time, the relationships with your customers are characterized by a higher degree of anonymity than is the case with a B2B concept.  

For your concrete approach to investor screening, the following should apply: Check your investor’s preferences and compare their portfolios with your startup. Additionally, you can research social media such as LinkedIn.  

 

However, you should avoid contacting your investors via email at all costs.

Your startup Maturity

The so-called start-up Maturity indicates the “state of maturity” of your company. Your investor should always be able to recognize this based on concrete facts and figures. Examples for these sales details are EBIT overviews and break-even forecasts.  

 

Within your maximum 3 minutes pitch, your investor should be made aware of all important facts and figures. A solid selection of target investors is worthwhile here in any case.

Company valuation vs. company assets

Every investment in a startup is always associated with a relatively high risk for an investor. Your task is therefore to prove that an investment in your company is nevertheless promising and safe by means of tangible figures.  

 

You should rather do without prognosis-oriented evaluations. The best way to gain your investor’s trust is by means of a professional company valuation.  

A company valuation using the asset-based or discounted cash flow (DCF) method is suitable for this purpose.  

 

Give your investor the certainty to act in both your interests, show your value creation prominently and make your start-up a success together!

The types of investment

Investors focus and offer different types of investments. Depending on the business model of your investor, he favors one or more financial investments in your start-up. Therefore, it is important that you know the different types of investments and that you can use them in the equity management of your company. 

 

In order to be able to negotiate as smartly as possible with your investors, you should also keep as much equity as possible in founders’ hands. A few bootstrapping iterations can often profitably improve your negotiating position with future investors. 

Not all investors are the same

This blog aims to help you on your personal journey to understand the basic investor types and smartly incorporate their preferences into your own equity management.  

 

Investors are different: Basically, you should always select investors according to their respective ticket size and exit strategy.  

 

up4d would therefore like to support you in your individual investor research and find personalized investors with you. Start with us and make your startup fly! 

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