Friends & Family
It may come as a surprise, but 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. 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.
However, it is of the utmost importance that all investments are thoroughly documented. You should require that they sign a document acknowledging the risk and clarifying that they may not be getting their money back. 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. Have each party sign a promissory note that spells out the repayment terms or, if you are partnering with a friend or family member, sign a partnership agreement.
There are an estimated 268,100 active “angel” investors in the United States. They invest an estimated $20 Billion into 60,000 companies a year. On average, they invest $74,955 into companies.
An angel is a high net worth individual who invests directly into promising entrepreneurial businesses in return for stock in the companies. Many angels are successful entrepreneurs themselves, as well as corporate leaders and business professionals. Angels can be an ideal fit for start-ups, because their personal interest in the healthy growth of the business, and their own litany of past successes and failures often prompt them to act as mentor and coach to their portfolio companies. This can include introducing the entrepreneurs to potential customers and investors, identifying and advising on potential problem areas, and generally helping the startups gain credibility and recognition in their industry.
Angel groups are organizations formed by individual angels interested in joining together t evaluate and invest in entrepreneurial ventures. This scenario allows angels the ability to pool their capital to make larger investments. In 2012, there were 385 American angel groups on record in the Angel Resource Institute database.
There are 462 active venture capital firms in the US. In 2012, VCs invested $22B in startups. VCs write the biggest checks of the four investor types, with an average investment size of $2.6MM to seed stage companies.
Venture capital firms are in the business of reviewing, assessing, and investing in new and emerging businesses. As a result, VCs look at a very high volume of deals, and on average only invest in 1 out of every 100 deals they consider — compared to angels, who invest in 1 out of every 10 deals. Furthermore, VCs conduct significantly more due diligence than angel investors, spending an average of 5 months on due diligence for each investment.
While angels will occasionally act as mentors to the entrepreneurs they bankroll, venture capital is consistently an active, rather than passive, form of financing. These investors seek to add value, in addition to capital, to the companies in which they invest, both to help your company grow and to achieve a greater return on their investment. This means active involvement: virtually all VCs will want a seat on the Board of Directors.
Although most VC firms will have a website, or other means of sending in cold call solicitations, it is always best to be referred to a VC by a mutual acquaintance. This is one of the many benefits of equity crowdfunding: by asking your existing supporters to share your fundraise with their own networks, you open yourself up to the possibility of making connections that were previously thought impossible. Who knows? Maybe your aunt’s old high school flame has a colleague who is a partner at your local venture capital firm.
In 2013, customers rallied behind their favorite companies through crowdfunding campaigns, and contributed an estimated $5.1B in total — up from $3.2B in 2012. The average amount of funding raised by these companies is approximately $7,000.
Crowdfunding raises rely on contributions and support from your personal and professional networks, so it is essential to develop a marketing strategy to achieve success in your crowdfunding campaign. It has been proven time and again that social media outreach is a must: for every order of magnitude increase (10, 100, 1000) in Facebook friends, the probability of success increases drastically: from 9%, to 20%, and to 40%. Similarly, there is a direct correlation to the amount of outside links to a crowdfund and the success of the raise. It cannot be stressed enough how crucial it is for entrepreneurs to encourage not just contributions, but to also encourage their fans and followers to share it widely!
Generally speaking, the average crowdfund supporter is between the ages of 24-35, and is internet savvy. Men are much more likely to contribute to an unknown startup, and those individuals who earn more than $100,000 each year are the most avid crowdfund supporters.