Five different types of investors for small businesses
Entrepreneurs sometimes need to raise money from investors to start or expand their companies. Below, you’ll find a list of different types of investors you could approach if you need funding for your small business.
What are investors?
An investor is an individual or organization that contributes capital to a business with the expectation of a financial return. Most investors generate returns through equity or debt investments.
- Equity investments: The investor owns part of the company through stock. If the value rises, the investor can profit by selling stock.
- Debt investments: The investment is structured as a loan, and the small business will pay it back with interest over time.
What is an investor’s role in a small business?
An investor can provide the funds you need to start your business or expand by introducing a new product or launching into a new market. Not only do they provide capital, but they can also share their knowledge, expertise, and connections to help your company scale in the right direction. The investor can then maximize their return.
Types of business investors for small businesses
Although there are many different types of investors, they typically fall into one of three categories:
- Pre-investors: Pre-investors are people who have the means to invest in your business but otherwise do not invest, such as friends, family members, and other individuals. They tend to invest during a company’s earliest stages before the business can access other funding sources.
- Passive investors: Passive investors contribute capital but do not usually actively participate in the company’s management, financial, or operational decisions.
- Active investors: Active investors take a hands-on approach with the companies they contribute to. They usually buy a controlling stake in the company and exert influence over how the business operates through a seat on the board.
Different types of investors
Before you start looking for investors for your small business, it’s crucial to understand the different types. This ensures you choose the right one for your company when you need funding.
Angel investors
Angel investors are wealthy individuals who invest in small businesses. They tend to invest in startups and newer companies, which may need help attracting other investors. Angel investors typically invest in companies they believe will perform well in the long run, even if the business has yet to profit.
Angel investors are usually passive investors who only ask for a return on their investment. Some angel investors, though, can share a wealth of experience and connections to help support the company’s growth.
Private equity investors
Private equity investors contribute capital to companies not traded on a public stock exchange. They look for mature, well-established businesses to invest in.
Private equity investors are active investors who typically seek a majority stake in a business to improve the company’s performance over time. They may add new people to the company’s management team and change how the business works to help ensure a robust return on their investment.
Venture capitalists
Venture capitalists (VCs) are organizations that invest in companies with high growth potential in exchange for an equity stake. They are active investors who often ask for a seat on the business’s board to guide the company and influence decisions.
Venture capitalists generally invest in businesses with a proven track record but need additional funding to scale. They typically only invest once a company has shown that it has the potential for significant revenue growth and tend to commit significantly more money than angel investors.
Corporate investors
Corporate investors are corporations that invest in other companies. They may invest in small businesses to support their growth, diversify their assets, or gain access to talent and technology to keep up with industry changes. The type of companies a corporate investor contributes capital to will ultimately depend on the corporation’s goals.
Crowdfunding investors
Crowdfunding is a type of peer-to-peer lending where a business raises small amounts of capital from many individuals. Through crowdfunding, a small business can receive capital from anyone who believes in the company. Crowdfunding websites like Kickstarter make this type of investment possible. Investors often receive products or other benefits in exchange for their contribution.
How to choose the right investor for your business
The right investor can help launch your company to the next stage, but the wrong investor could do more harm than good. Here are a few tips to help you make the right choice.
- Understand your funding choices: Decide whether you want a passive or active investor, and consider your options based on your company’s performance history.
- Make a short list: Narrow down your list of potential investors to the ones you feel would be the most appropriate for your company. Consider each investor’s reputation, previous partnerships, and mutual connections.
- Perfect your pitch: Your pitch should effectively communicate why an investor should contribute to your company, including an outline of how and when they can expect a return on their investment. To maximize your pitch’s impact, tailor it to each investor you’re targeting, highlighting the aspects of your business that align with their interests and investment strategies.
- Look at investors’ expertise: Consider each investor’s portfolio to ensure that they have experience in your industry and that your business meets their investing preferences.
- Consider investors’ track record: When looking at each investor’s portfolio, ensure they have a history of working with successful companies.
Finding a buyer for your small business
There are many different types of investors. Depending on your goals, some will be more advantageous to your small business than others. If you’re ready to sell, read our article “How to find buyers for your business.” Lastly, find out how brokers can help you find and buy the perfect business.