Searching for Startup Capital - Equity Financing Options
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Authored by Bryan Springmeyer Bryan Springmeyer is a California corporate attorney who represents startup companies and investors. The information on this page should not be construed as legal advice. |
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Friends and Family
This category is intuitive. Your friends and family know you well enough to assess your potential and hopefully they like you enough to take the risk. However, the people in your circle might not have the extra money to use as investment capital. Additionally, their lack of experience with the industry and investing could make this type of endeavor intimidating. You should discuss any investment with someone who knows securities law. Even an investment from friends and family implicates state and federal securities laws. Also, the terms of these investments can impact the appeal for and ability of future investors to participate.Angel Investors
“Angel Investors” are private wealthy individuals who are willing to finance your business for a share in the company. This can be a great way to meet the capital requirements of your company without having to personally guarantee a loan.The ability to find an interested private angel investor depends a lot on your particular venture. Angel investors are often successful business people who know a particular industry very well. They are far more likely to invest in areas of familiarity, so they can properly assess your business. Their expertise can often be a valuable resource in addition to their investment.
One way to find private angel investors is through their angel networks. An angel network accepts formal plan submissions, reviews and screens them, and notifies investors about opportunities that pan out. A list of California angel groups can be found here. The networks each have their own investment criteria, meaning there are specific types of ventures that they are interested in. Angel List which essentially amounts to a loose web-based angel network can be a good way to begin conversations with angels. I have a couple of clients who raised sizeable seed rounds solely from investors they met on this platform. However, nothing works as well as an introduction by a mutual acquaintance.
Super Angels
Super angels are (technically) venture capital funds that provide seed round funding. These are actual private equity funds, formed as a business entity, and investment decisions are made by management. This is different than the angel groups where the decision to invest is made by an individual with their own money, typically syndicated with other individuals to meet the capital requirements. It is different than the traditional VC funds in that there is a much lower minimum investment amount. Many of the traditional venture capital firms are now lowering their minimum investment amount to compete with Super Angels. The Super Angels still seem to be fairly distinguishable from traditional VC firms. The funds for super angels tend to be comprised largely of entrepreneur's money. VC's funds tend to be comprised of institutions' funds, like pensions and university endowments.
Here are a few:
SoftTech VC
500 Startups
IA Ventures
Felicis Ventures
Founder Collective
Harrison Metal
K9 Ventures
Accelerators/Incubators
One notable accelerator (don't call them an incubator) is Y Combinator in Mountain View, California. Y Combinator also acts as a (small) seed fund. They have a standard investment agreement, which keeps their transaction costs down. This allows them to give smaller amounts of money to startups (average $18,000, according to their website), for which they take a small equity stake in the company. Y Combinator then puts the founders through three months of training.
Many universities also have incubators, including UC Berkeley's Skydeck and Stanford's StartX.
Venture Capital Firms
Venture capital firms operate by raising money to form a venture capital fund. The funds are typically in the hundreds of millions. Once the fund is formed, the firm invests in early-stage and growth-stage ventures. VC transactions are almost always preferred stock, with the series of preferred stock issued in the deal typically categorizing the transaction (i.e. "Series A", "Series B" and so on). Most venture capital firms invest in companies at Series A, which is typically around $2-$5 million for software and SaaS companies, though I've worked on Series A transactions up to $12 million. Other VC's may only provide growth capital for more mature companies. VC's tend to invest larger amounts of money than angel investors. The minimum investment for smaller funds is usually around $250,000. Theoretically, there is no maximum. Groupon recently closed a $500 million Series-D transactions, though there were multiple investors involved, including Morgan Stanley.
Venture capital firms tend to be more rigid than angel investors, as the VC fund managers are investing other people's money. In addition, the fund manager's present compensation and ability to raise money for future funds are a direct result of the success of the fund. This means that VC's are less likely to invest in higher risk companies, even with the appropriate valuation, and they require a higher ROI, which results in a lower present valuation of the company in their discounted cash flow analysis.
A list of VC’s can be viewed here.