Too many entrepreneurs approach fundraising thinking that all money is the same. “An ‘investor’ is someone with money, and therefore all people with money can be an investor in my business.” Well, not exactly, and here’s why.
The right investor entirely depends on the stage of your business cycle, your target markets, your business model, your personality, and a host of other factors. The investor to entrepreneur relationship is very much like a marriage, and should be entered into with extreme care and due diligence, much as you would with a marriage. But, it should be noted, that if the two of you are determined to make it work, it could work!
For the purposes of this article, let’s outline 5 types of investors available to your business based on the stage of your business. We make this delineation because investors of different size and complexity are often bound by different criteria, whether voluntarily or contractually, so you may be entirely wasting your time if you’re fishing in the wrong ponds. And one more assumption we need to clarify up-front: professional investors will only be interested, regardless of where your company falls in these categories, if the opportunity you’re chasing is big enough.
Pre-Seed, or the 3F Group (Fools, Friends, and Family). This is where your business is nothing more than an idea. No professional investors will invest in just an idea, with no proof in the pudding and no intangibles drawn together to support the market’s interest in the product, or a prototype of the product to demonstrate. Investment size is typically $5 to $20,000.
Seed Stage. This is a tricky classification, because it can be placed on companies anywhere from a validated idea and a clearly laid out business model, to those who have produced an MVP (minimum viable product) but are seeking to round out elements of the product offering in order to garnish the love of its customers. Ultimately, investment of this form comes from industry partners, government grants, or a select group of risk-loving angel investors. Investment size is typically somewhere between $25,000 and can reach a high of $1 Million.
Early Stage. This is perhaps the grayest of all the areas, as “early stage” could be used for any of the preceding descriptions, but this terminology is widely used for companies that have a product that has been loved by its early adopting customers, but they need the size and sophistication to grow their operations. They need money for marketing and a more sustainable team of key personnel. These companies don’t yet have an exact formula of “Put in X dollars into the machine and product Y dollars on the other side,” but they have a strong case that a business can be built around the product and business model. Many more professional investors are interested in this type of company, garnishing the interest of angel investors, and a few early-stage Venture Capital groups. There is no typical investment size, but the range could include investments from $250,000 to $3 Million.
Growth Equity. This has become a favorite stage for professional investors of late. The most notable successful group in Utah to pioneer this stage is Mercato Partners, with successful investments such as Fusion IO, Skull Candy, MediConnect Global, Ingram Medical, and Control 4. This is a favorite for investors because the early stage company has grown and shown a profit, demonstrating that a formula exists where investors can have a fairly proven expectation of a return on investment. The small notions of risk that still exist provide the opportunity for a big payout, with much less downside than existed in earlier stages. This is the scaling stage of the business, where money is needed to grow market share and prepare the company for an exit. These groups are your VC’s, Growth-Equity groups, and pretty much any other investor that is willing to pool together a sizable enough investment. Typical investments are $5 Million and up.
Private or Public. Every good pony ride comes to an end. Entrepreneurs and early investors need their exit, and private equity groups and investment bankers are there to help. Larger, profitable companies with a sustainable yet expansible future are great targets for buyout groups and public offerings alike. Cash-out amounts entirely depend on the size and profitability of your company.
In the end, remember that all money is not the same. Not only will the stage of your business dictate which investors will be interested, but investors will participate in your business more or less depending on their approach and the stage of your business. Angel investors typically are more hands-on, so they should be chosen with more alignment than later investors. If you’re not ready to be tied down to milestones and professional guidance, it may be best to consider bootsrapping your company and growing it organically. Remember that money never comes “no strings attached.”