Venture Investors Overview
Who are the actors that invest in the various stages of a business lifecycle?
Friends, Family, Fools FFF (Pre-seed-Seed)
FFF usually are the closest source of capital for prospective entrepreneurs. FFF provide cheap capital believing in the person that stands behind a business. Usually emotions are involved when taking an investment decision. Thus, to avoid future conflicts in the circle of family or friends, an entrepreneur should highlight the risks they are taking.
Incubators are organizations that aim to boost startups in the pre-seed/seed phase supporting them in evolving the invention. Incubators offer a variety of services including physical space, communication infrastructure or discounts on other services like insurances. Further they help start-ups to identify appropriate funding opportunities and provide access to their business network that encompasses different types of investor. The network members may provide financing and/or mentoring services. Typically these investors cover capital requests between US$ 25.000 up to US$ 500.000. Incubators generally do not have a strict focus on the amount of time a business spends in the program, they can persist for two or more years.
Contrary to incubators, accelerators focus on accelerating a business in a short time frame - a development that instead would take about two years' time. The aim is to increase radically the chances to obtain funding by investors and to foster growth after passing the program. In the time frame of three or four months an intensive mentoring program takes place where the business is structured and problems are tried to be solved. At the end of the program the participants are pitching their business concept to an audience of investors. Accelerators provide only a limited amount of cash, typically about US$ 20,000 in exchange for an equity stake.
Venture builder (Pre-seed-Seed)
Venture builders develop many projects at once and then build separate companies around the most promising ones by assigning operational resources and capital to those portfolio companies. The most basic scenario is an enterprise that makes available its resources aiming to integrate the most promising startups in a second step. Variations of the concept exist (business builder, startup factories, venture flipper) depending on the willingness of the founders to stay in control of the business or to exit it quickly.
Crowdfunding is a form of funding where an entrepreneur raises small amounts of money from people using the Internet. Crowdfunding can be equity based or rewards based. The first endows the investor with an equity stake of the startup whereas the latter rewards the investor with a gift/prototype/finished product of the startup. Crowdfunding is a young industry, thus legal regulations vary from country to country. Crowdfunding is highly risky because information provided by a crowdfunding campaign might not be as meaningful as information resulting from a due diligence.
Business Angels (Pre-seed-Seed)
Business Angels are private investors that have become a critical source of financing for seed and early-stage companies. Angel investors are not mainly driven by the financial rewards but they also strive to pass on know-how to young entrepreneurs. This because they have considerable experience in particular industries often being successful entrepreneurs on their own. The size of the investments that angels make varies depending on the type of investor, but angels typically invest from US$ 50.000 to more than US$1.500.000. Angels often not invest alone but build groups or syndicates to make a joint investment.
Venture Capital (Early Stage)
Venture Capital (VC), also called risk capital, plays a vital role in the growth phase of enterprises when they begin to commercialize their innovation. Venture Capitalists raise funds from large institutional investors, including pension funds, banks, insurance companies, investing it in a selection of entrepreneurial firms. VC is no long term money. The investors aim to exit the investment in five to ten years' time obtaining a significant rate of return. Exit strategies might be initial public offering (IPO) trade sale, secondary sell, management buyout and in worst case a write off.
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