By Starting a startup is no small endeavour. It requires determination, dedication, creativity, and most importantly, funds. Funds are the lifeblood of any business. They are required in all stages of a business, from the inception phase, through the growth stage, and into the maturity stage. However, getting the necessary funds is not always an easy task. Often, entrepreneurs have to rely on investors to fill in the gap. In this article, we will delve deep into the different types of investors in startups, including angels, early-stage investors such as accelerator programs, venture builders, seed-stage investors, and growth-stage investors.
First off, let’s start with defining what an investor actually is. Investors are people or entities that provide capital to bourgeoning or existing startups with the expectation of receiving a return on investment that’s higher than the initial capital invested. Investors can be individuals, partnerships, corporations, or even governments. They fulfil a key economic function by providing liquidity to the market and fostering innovation by supporting entrepreneurs who might otherwise lack the financial resources to implement their business models.
Angels
Angel investors are often high-net-worth individuals who provide financial support for small startups or entrepreneurs. They are typically the first type of external investor to support a new business concept, often injecting capital in exchange for equity or convertible debt. These investors are called ‘angels’ because of their willingness to invest in high-risk, unproven business ventures, often based solely on the potential and drive they see in the entrepreneur.
Angels are typically successful entrepreneurs themselves or have acquired wealth through other means and are looking to invest in industries they are knowledgeable about or passionate about. For example, a tech entrepreneur who sold his successful startup could decide to become an angel investor, using his accumulated wealth to invest in other promising tech startups. Some of the most prominent angels in Africa include the Lagos Angel Network and Cairo Angels.
Early-Stage Investors: Accelerator Programs
Accelerator programs are increasingly becoming popular in the startup world. They are short-term programs that include mentorship and educational components and often culminate in a public pitch event or demo day. Accelerators help entrepreneurs by providing seed investment in exchange for equity. They focus on team building, innovating, and launching a product or service while encasing the entrepreneurs in a supportive community.
An excellent example of an accelerator program is Y Combinator – an American accelerator that has produced successful companies such as Airbnb, Dropbox, and Reddit. In Africa, some prominent accelerator programs are run by Flat6Labs in North Africa and BaoBab Network in Kenya among others.
Early-Stage Investors: Venture Builders
Venture builders are organizations that build companies using internal resources. They bring in business ideas, dedicate a team to develop the concept further, and finance the operation until it is self-sustaining or attracts outside investment.
Rocket Internet is a classic example of a venture builder. They identify successful startup models worldwide, recreate them in new markets, and then scale them rapidly using their substantial capital and operating resources. Such companies included Jumia, Jumia Food and Jumia Travel. Prominent venture builders in Africa are Founders Factory Africa (FFA) which has offices in Johannesburg, Logos and Nairobi. Others include MEST Africa which is headquartered in Ghana.
Early-Stage Investors: Seed-Stage Investors
Seed-stage investors are crucial for startups in their initial stages. They fund the early stages of a company when it is most vulnerable to failure. The entrepreneurs use this capital to build a prototype, conduct market research, hire a team, or fund other activities necessary for a new business to gain its initial traction. In Africa, early-stage investors include Microtraction, Ventures Platform, Future Africa and Launch Africa Ventures among others.
Growth Stage Investors
Growth stage investors are typically venture capital firms that invest in startups that have proven their business model and are looking to expand their business rapidly. These investors come into play when the company is looking to go beyond the startup phase and wants to become an established industry player. They bring in more substantial investment sums that would enable the startup to scale up quickly, often in return for equity in the company.
For instance, Insight Venture Partners is a leading global venture capital and private equity firm investing in high-growth technology and software companies. There are few growth-stage investors in Africa but the prominent ones include Partech Partners and Enza Capital.
In conclusion, there is an array of investors that startups can leverage to propel their growth. The type of investor best suited for a startup depends on factors such as the startup’s stage, financial needs, and the founders’ willingness to cede some control of their company. It’s important for startups to be mindful of the uniqueness of their situations, and to foster relationships with the type of investor that aligns with their business model, objectives, and growth expectations. This is because the decision to bring an investor is not just a funding decision but also a decision to bring a partner on board – one who has a stake in the organization’s outcome.
A variety of funding options open up as a startup progresses, and entrepreneurs should use this to their advantage. By understanding the pros and cons of each investment type, and carefully aligning investor expectations, entrepreneurs can ensure they are strategically positioning their startups for success.
Note: Original Content by Jon Lubwama
