The First Round
Understanding the different types of investors is an important part of the investment process. The basic concept is that the type of investor that you seek should be the right one for your stage of business (pre-revenue, revenue, growth stage) and for the amount of money you are seeking. Traditionally, seeking investment from your family and friends is the first stop. Simply because they should already trust you, believe in your company and want to support you.
Friends and Family
Friends and family invest the most money in startups in aggregate, investing over $60BB per year. In fact, 38% of startup founders report raising money from their friends and family. The average amount invested is $23,000. Seeking investments from friends and family can be an ideal way to raise seed money to get your company off the ground. Keep these things in mind:
- Future Potential. This group can also be a great resource for very long-term investments, motivated more by loyalty and support than by strict return on investment. These close circles generally consist of the individuals most likely to feel a strong affinity for your brand — or, simply, to you.
- Documenting. It is of the utmost importance that all investments are thoroughly documented.
- Know the Risks. Mixing business with pleasure is notoriously risky, and for good reason. Before taking their money, do some soul-searching to be sure that your ties are strong enough to withstand the worst. By accepting their investments as you launch your company, you risk hurting your loved ones’ finances. It is imperative that all parties are on the same page, literally and figuratively.
- Stage. Friends and family are best used only at the beginning of a company, when there are little or no alternatives available. They also make sense for very long-term investments motivated more by friendship or family than by strict return on investment. They might also provide the earliest seed money for companies that grow and receive other investments later on.
There really is no optimal type of investor – it all depends on your stage and your needs and what an investor can bring to the table in both capital and other help they can bring your business.