What’s The Right Type of Investor For Your Scaleup?

26th July 2021
Scaleup startup

There are a variety of funding avenues available for scaleups looking to score their Series A, B or C funding.

Not all investor types are the same. The suitability of investors for a scaleup company will depend on your industry, goals, size and much more.

Each type of investor funding offers different advantages for the scaleups that attract them. Some investors will provide more financial capital but potentially less creative freedom and more pressure to see fast returns than other kinds of investors.

The best way for scaleup businesses to know which funding to seek, and what strategies to use, is to educate themselves. Let’s analyse some of the most notable types of investors who provide funding to scaleup businesses.

venture capitalist

Venture Capitalist – Venture capitalist firms hold pools of finance in funds from individuals and businesses which they then invest. They are a great option for startups and scaleups as they frequently look at businesses at the stage of actualising and commercialising their ideas. They provide capital in exchange for an equity stake in the company.

Benefits – VCs are an especially good option for scaleups that are a bit more established than startups. The typical investments of a VC are larger than that of an Angel Investor. Scaleups often require large funds to get to the next level.

Drawbacks – VCs can be more risk averse than Angel Investors as they are using a fund of other people’s money. They are also less likely to invest in very early-stage startups. However, they are ideal for scaleups looking at their Series B or C funding.

angel investor

Angel Investor – An Angel Investor is an individual, private investor of high net worth. They are usually accredited, professional investors. They provide financial backing to startups and scaleups in exchange for ownership equity in the company. They are often considered the opposite of venture capitalists since they use their personal finances instead of a pool of funds.

Benefits – Angel investors are often highly coveted by both startups and scaleups alike. They stereotypically tend to make riskier investments on more favourable terms than other types of investors. This is because they often invest in the entrepreneur rather than with only a view on making a profit.

They can make more personal-interest-driven investments since they don’t hold others’ money. However, they are more stable than other kinds of personal investors because they are accredited. Angel Investors are often viewed as less ‘predatory’ than other kinds of investors.

Drawbacks – If you’re a new entrepreneur and this is your first startup or scaleup then it will be harder to attract the attention of an Angel. Angel Investors typically don’t invest as large amounts as VCs, so for a scaleup, the capital may not be enough alone.

Private Equity Firms – These are very similar to venture capitalists in that they bring together pools of funds from accredited investors. The big difference is how much they invest and to whom. PEs tend to buy big stakes e.g., 50% of a company and these tend to be more mature companies. They are also more commonly drawn to traditional industries rather than tech, which is more popular with venture capitalists and Angel Investors.

Benefits – Large investment of capital. Good for established scaleups with huge potential that might have hit a roadblock and fallen into difficulty and need ‘saving’.

Drawbacks – Not applicable to most startups and scaleups. While there can be some PEs applicable to larger scaleups further along in their development, mostly PEs will invest in fully established, mature companies. Being a large stakeholder also means little autonomy for the entrepreneur.

personal investor

Personal Investors – Similar to Angel Investorsbut less specifically defined. An Angel Investor is a Personal Investor by definition, but a Personal Investor may not necessarily be an Angel. Theoretically, they could have less wealth or not be accredited.

Benefits – Similar to an Angel Investor but at a smaller funding scale potentially.

Drawbacks – Potentially unaccredited.

Peer-to-Peer lending – Peer to peer lending platforms create marketplaces where individuals and businesses can come together to loan money to scaleups and other businesses. Rather than owning a stake in a business, investors’ money is matched to a loan for a person or business. A loan is very different to equity: it’s a specific amount of money, repaid over a defined term, and investors earn a return via interest payable on the loan. Lenders can select their interest rates and those businesses willing to pay higher interest tend to be riskier investments. Peer-to-peer lending platforms may specialise in lending to certain types of borrowers, so you can find your niche easily.

Benefits – It is much easier to get this loan than from a bank. It is relatively simple and straightforward to get started much like crowdfunding. However, peer to peer lending tends to have more predictable returns than say crowdfunding but follows a similar model of smaller amounts from more people.

Drawbacks – There are hoops to jump through for getting your business in the peer-to-peer lending platform just like with crowdfunding. As the loan amounts tend to be bigger there are more hoops to jump through. Peer to peer lending is still young in the UK and less regulated, therefore there is actually more risk to the lender than the scaleup business, however, this could change as more government legislation comes in. Also, the platform will step in if repayments aren’t made. It is a loan, not standard funding, and the interest rates can be high.

crowd funding

Crowd Funding – This method of funding allows scaleups and startups to access small amounts of financial support from a very large pool of people. Many well-known internet platforms have risen up to allow this process to be easier. Kickstarter and GoFundMe are well-known crowdfunding platforms.

Benefits  – Highly accessible. Simple with little learning curve required. Gives a chance of scaling to non-traditional businesses and concepts. Minimum stakes are exceptionally low, so more people take the risk to invest as costs are spread through a large pool of backers. It can also simultaneously help grow an audience for the product or service akin to marketing.

Drawbacks – There are some limits to who can set up their business on these platforms and attract funding. If you fail to reach the funding target all your money could be taken and given back to the investors. Failure risks a damaged reputation in your target audience. If you have no patent or copyright, people can steal your idea after seeing it on a crowdfunding platform. You can give away too much of the business to your investors. You must do a lot of premarketing, and interest generating to gain attention and hit your targets. That costs money you don’t yet have.

Bootstrapping – Self-funding from your own finances. Great if you’ve got the required wealth but it can be a black pit for your money. As you move from startup to scale it is likely you will need larger and larger amounts of funding to scale quickly enough so bootstrapping is rarely sustainable for real scaleups via anyone but the ultra-rich.

Benefits – Complete autonomy for the entrepreneur. No red tape or time wasted waiting on pitching for funding. No loans to pay off if the business fails, as the owner only risks their own money. They also gain a wealth of experience in allocating funds. If the business is a success, it will make the entrepreneur much more attractive to other investors when they launch their next business and pitch to other kinds of investors.

Drawbacks – It can be incredibly stressful for entrepreneurs to put their personal finances on the line. The lack of capital can stagnate growth even when the offering is successful. Often demand can exceed what the business can provide due to a lack of funds.

As you can see accessing funding for scaleups and startups isn’t a one size fits all philosophy. It is also important to remember that investments can go beyond financial help. Some investors will also provide resources and experience.

Hardsoft Leasing Ltd can assist scaleups with vital IT equipment for their staff. We’re an accredited reseller of Apple, Windows, Lenovo and many more manufacturers, however, we can make fully autonomous decisions on which companies with which we enter into leasing contracts. There’s no hidden third-party financing company, we make all our own decisions.

By leasing state-of-the-art devices we are investing in the future of your company and cutting upfront costs for scaleups, allowing them to grow more quickly with better cashflow.