Understanding the Types of Investors

Let’s start by talking about five different types of investor.

  • An accelerator is an organization that takes in “seed stage startups” – startups that often are little more than a couple of people and an idea. The accelerator gives these startups some money in return for a small slice of the company’s stock. Then the accelerator runs the startup through an intense educational experience for 3 to 6 months. Usually an accelerator provides its graduates with introductions to angels and angel groups. A typical accelerator will advertise a statistic like, “75% of our graduating startups have received angel investment.” More info on accelerators and how they help is here.
  • An angel is anyone who might be willing to trade their money for shares in your company, and who qualifies as an accredited investor. There are “casual angels” and “professional angels”. Therefore angels can be a friend, a relative, a neighbor or a wealthy individual – just about anyone with excess cash and an interest in your company.
  • An angel group is a group of people who have pooled their money together to invest in companies. For example, 40 entrepreneurs can form a group and they each contribute $50,000 to create a $2,000,000 fund. They might set out to invest in 10 companies over the course of three years. The group hears presentations from companies at monthly meetings and decides together whether to invest or not. Just about every largish city has angel groups – use Google to find them.
  • A venture capital firm is a company designed to make investments. It raises money from places like pension funds, university endowments, corporations and wealthy families (also known as institutional investors). The partners in the firm hear presentations from companies and the firm decides whether or not to invest. A VC firm could, for example, raise a $100 million fund to invest in 10 to 15 technology companies, but funds of $1 billion or more are becoming common.
  • A relatively new phenomenon is the super-angel. These are individuals who have enough money and clout on their own to act something like a one-man VC firm.

As you might imagine, the amount of money available generally rises as you go from accelerator to angel to angel group to venture capital firm. Similarly, the level of formality is lowest for an accelerator and greatest for a VC firm. If you are approaching a casual angel investor, you might be able to talk to him/her for 20 minutes and get some money on a handshake deal and a convertible note. This is not necessarily a smart thing to do, but it happens all the time. Getting money from an angel group or a VC firm might take six months or more.

Investors like angels and VCs generally have two things that distinguish them:

  1. The type of companies they invest in, for example: B2B software companies, consumer products, biomed startups, clean tech, etc.
  2. The stage of company they invest in: seed stage, growth stage with $10+ million in revenue, pre-IPO, mezzanine financing, etc.

Accelerator or Angel?

Some startups choose to start with an accelerator. Some startups choose to go straight to Angel investors. Which is right for you?

If this is your first startup, an accelerator may be the right path. It can sometimes be difficult to get an Angel to take you seriously if there is no one on the team with deep startup experience. On the other hand, getting into accelerators is not a trivial thing because of these statistics:

  • This report indicates that 3,000 companies per year get accelerator berths in the U.S.: http://gust.com/accelerator_reports/2016/global/
  • This article says there are 170 accelerator programs in the U.S.: https://www.entrepreneur.com/article/271000

Not all startups do accelerators because of these low numbers. Compare to this statistic:

“American angel investors pumped an estimated $24.6 billion into more than 70,000 startups across the country in 2015. ” [ref]

Whichever type of investor you are approaching, they are all looking for the same kind of thing: They are looking for a good investment. They hope to make 10X, 25X, 50X, 100X on the money they invest in the startup, depending on the stage. What is the most important marker for a good investment? Jump here…