6 Types of App Investors For Startups Explained
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All entrepreneurs and startups will come to face a need of investors in their product, or in this case, application. The eventual goal of an investor is to achieve a return of investment (ROI), which means that they expect to make profit out of your product after investing in it. Investors also make sure that they have a solid exit strategy, which guarantees them of a way out to reduce or liquidate their stake in a business once predetermined criteria have been met.
Before they even consider investing in your application, they want to know exactly where you and your business stand in the market, what experiences you have, and what the potential profit can be in the end. Unfortunately, having your application developed by professionals isn’t cheap, so it’s likely that you have to rely on an external investor at one point during the development process. In that case, it’s good to know what type of investor fits your needs, as an entrepreneur should always have a strategy prepared to move to their business to the next level. In this blog we will dive deeper into different types of app investors for startups.
1. The friend or family member: €1.000 - €10.000
Also known as “FFF”, (Friend, Family, and Fool), investments from close acquaintances is probably the easiest way to get started as an entrepreneur in search of capital. Perhaps there’s a friend or family member with enough capital and motivation to help with taking the business from the ground. Usually, they also don’t mainly focus on the potential success of your product for their own benefits, but like to invest anyway because they want to help you out. For investments from friends or family it’s crucial to have an official document with concrete arrangements. If things don’t work out as planned, these arrangements are essential in order to avoid miscommunication and potentially hurtful situations. Mostly, investments from friends, family, and other people in your close social network take place at the very beginning of setting up your business or product. That’s because their investments are generally not more than a few thousand dollars, which might not be enough in a later stage of your startup or product development.
Many successful companies started their journey with an investment from a friend or family member. Jeff Bezos from Amazon began with a loan from his parents, and Elon Musk started his first company with the help of a family investment. The popular video chat site Chatroulette is built upon a $10.000 dollar investment from an, at that time, 18-year old Andrey Ternoviskiy’s parents. Many of Lizard Global’s clients also started out with an investment from a close acquaintance, and we see it as our task to help them prepare for the next level.
- Familiarity with the investor
- The investor likely focuses more on helping you out rather than gaining profit for themselves
- Quick and easily accessible
- Often provides a limited amount of money
- Requires strict arrangements to avoid personal issues
- Can cause emotional struggles if things go sideways
2. The Angel Investor: €10.000 - €100.000
An angel investor is an individual who generally invests in small businesses and startups, providing a certain amount of money in order for the business to “start up” or expand. The angel investor typically has a little bit of money on the side, which they want to invest in an idea or product that fits their interest, and in which they see a successful future that can lead to profit. An angel investor normally requests a return of approximately 25% or more, and usually doesn’t invest more than a million euros.
Angel investment is a type of equity financing, which basically means that the investor provides funding in return for fulfilling an equity position within the company. Equity financing is mainly used by starting businesses that don’t have enough funds yet to invest in bigger financial institutions. This investor role can also be fulfilled by a family member, friend, or another acquaintance that already has an established bond of trust with the borrower. Some of our clients at Lizard Global got funded through angel investors, and we help them with the process of growing further.
- Less risky for the borrower than debt financing and loans
- Angel investors often have an investor network and can get multiple people to invest
- Angel investors often possess an entrepreneurial background themselves, and can therefore better judge the potential of success in a product or business
- Investors own a stake in your company
- Availability is based on your existing network
- Funding can be slow, expectations are often high
3. Accelerators & Incubators: €10.000 - €120.000
At Lizard Global, we have experience working with accelerators and incubators. These types of investors can be a great solution for startups to step up their game towards the next level. Unlike the other listed investors in this article, accelerators and incubators require businesses to participate in their programs, in which they seed your idea with their own knowledge and experience, and an investment anywhere from €10.000 to €120.000 euros. In return, they expect you to use this money for quick growth and fast results, following their program. If everything goes to plan and their investment proves to be successful, they give you the chance to pitch your idea to other larger investors who can invest in your business in the long run. Although these kinds of programs can be very helpful in quickly getting your business off the ground, they require a lot of work in a limited amount of time. So, be ready to fasten your seatbelts when going for an accelerator/incubator.
- Support in the form of capital investment plus additional knowledge and experience
- Easier access to larger investors later on
- Professional guidance during the entire program
- It can be difficult to apply and get accepted for these programs
- Requires hard work and quick success
- Quick growth can also harm a starting business on the long term
4. The Venture Capitalist: > €1.000.000
A venture capitalist, or VC, defines itself by large investments for startups and young businesses. Usually, they work for a venture capital firm that has a communal bag of money from its members. Venture capital organizations generally gain investment capital from pension funds, wealthy investors, insurance companies, etc. They differ from angel investors because of their bigger capital power, as well as their willingness to take risks on new industries and freshly starting businesses. Venture capitalists aren’t necessarily searching for stable and reliable companies, they rather see a high potential for immense growth and are willing to take the risks that come with these businesses. They normally count on a profit of ten times of their investment within a time slot of about seven years.
Just like angel investors, the VC investor supplies capital funding in exchange for an equity position in a company. Especially for starting businesses, it can be tricky to find a VC that’s willing to take the risk and invest in your business or product. Usually, they’re picky regarding their investments, and are only willing to invest when they are fully sure of the potential success of a product or business. Next to that, VC investors are generally always looking for a way if needed, which doesn’t contribute to a sustainable and trustful partnership on the long term. This is why many startups and new businesses rather look for angel investors of family/friend investors than VC investors.
- Less risky for the borrower than debt financing and loans
- The amount of money gained from VC can optimize the rapid growth of your business or product
- VC investors can connect your to other business leaders
- Investors own a stake in your company
- Rapid growth of your company with a large investment can be potentially harmful to the long-term success of your business
- VC investors aren’t easily impressed. You need to have a clear vision of the potential of your product to convince them to invest
5. Corporate Investors
Investing in small businesses and startups can be very beneficial for big corporations in the same industry. They do not only support their own growth, but also identify potential talents and technologies that can help them stay up to date with the transformations in their own industry. Corporate investors usually either choose to invest in an existing startup, or they can provide an ecosystem within their own company for a startup to be set up. One of Lizard Global’s clients eventually got bought by a large corporate investor after having their software developed by our team. Once the software was there, the investor gained enough interest to invest and help our client with its journey to the next level.
Generally, corporate investors are seen as great allies for startups to establish sustainable growth, but they require a careful approach and a lot of patience, as they are busy with steering their own ship as it is. Next to that, the involvement of corporate investors generally results in very little ownership of an entrepreneur’s own business or product. That’s why we often say that corporate investors “buy” a business, rather than simply investing in it.
- Enough capital available for big investments
- Reliable and experienced investors
- Can offer a lot of outwards publicity if the collaboration is successful
- Generally more difficult to approach directly
- In most cases, corporate investors buy and take over a business, rather than simply investing in it.
- Often possess a rather conservative and formal mindset
6. Equity-based Crowdfunding: +/- €500.000
Equity crowdfunding is defined by a group of people investing in an early-stage business or product in exchange for shares in the company, just like the other two types of investors. The difference between equity crowdfunding and angel or VC investors is their nature of organization. As the term itself already says it: crowdfunding consists of the collecting of money from a crowd of investors, rather than an individual or an organization. Equity crowdfunding, in particular, done by multiple people, often from a collective foundation. Equity crowdfunding campaigns are generally used by startups for marketing purposes and gaining commercial presence online, which can be a stepping stone towards finding a “real” investor. In that sense, equity crowdfunding doesn’t really fit in between the list of typical investors, but it can definitely help startups on the road of finding one.
- Again, less risky for the borrower than debt financing and loans
- Quick and easy access to capital: you can raise rather large amounts of money in a rather short period of time once your product gains popularity
- Requires a effort and investment in online campaigns to gain attention from the mass
- Money income depends on popularity on crowdfunding platforms
- Often lack enough capital input to really support the borrower on the long-term
How to find an investor?
Before you decide to reach out to an investor, it is important to have a crystal clear idea of what exactly you want them to invest in. To do this, make sure you have a mockup of your product ready to show to your potential investor. A mockup is a scaled design of your product, used to showcase how the end-product is supposed to look and function like. It enables potential investors to experience the look and feel of your product, and makes it easier for them to judge if it is something they think is worth investing in. Another thing to bring along is a pitch deck or press kit, which consists of a short description of your product and a full list of functionalities. Make sure to invest time and effort in making these assets, as it will eventually have a big impact on the chance an investor will find your product worthwhile.
Want to know more about how you can find suitable investors for the development of your application? We can help you with creating professional pitch decks and high-quality mockups that perfectly suit your business and product, so you can increase your chances of finding an interested investor. Get in touch with us, and we gladly give you more information about investors and some tips and tricks to help you get into contact with potential investors that might be interested in your product.