Let's Make a Deal...Door Number 1, 2, or 3?

How to choose what type of investor you'll need for your startup. It's not a probability puzzle.

Who remembers the gameshow Let's Make a Deal? There was usually something grand and impressive behind one of those doors and the other two usually left you walking away with the "I made it on tv and only got this lousy t-shirt" - but which one held which?

When it comes to entrepreneurs looking to secure funding there are several doors to open, but which one is right for your startup? Fortunately, there are a variety of options when it comes to securing funding for a new project:

Door #1 - Angel Investors

  • Typically a high net-worth individual that invests in a new or small business, providing capital in exchange for equity in the company.

Door #2 - Venture Capital Investors

  •  Firms that are part of the private sector and have a pool of money to draw from corporations, foundations, pension funds, and organizations.
Door #3 - Family Offices

  • Private wealth management advisory firms that serve ultra-high-net-worth investors usually exceeding $100 million to manage their investable assets.

How do you differentiate between these three? Here's The Good, The Bad, and The Why:

Angel Investors

The Good

  • Shorter closing time
  • More simple due diligence
  • Don’t usually interfere with day-to-day
  • Less aggressive in the terms they demand

The Bad

  • Their investment amount is smaller than institutional investors
  • Dependent on personal network
  • Won’t prepare you for raising money institutionally 

The Why?

  • Those trying to raise a small amount of capital quickly and with few strings attached
  • People with a large personal network
  • Those that don’t want to bring in board members
  • Those that don’t need help setting up governance structures

Venture Capital Investors

The Good

  • Experience and wisdom
  • Identify and reach the targeted exit
  • Guide you to a successful exit

The Bad

  • Often more aggressive terms
  • Incorrect value-add to your industry or company

The Why?

  • Near-term exit is the primary goal
  • Good VCs usually possess hard-won wisdom and business knowledge
  • If you need a lot of money and are prepared to go through a tough 4–6 month process, VCs may be your best bet.

Family Offices

The Good

  • A hybrid between VC and angel investor
  • Can offer more cash than angel but not as much as institutional
  • Typically are mission-driven and focused on specific industries

The Bad

  • Won’t prepare you for a large institutional round
  • Don’t offer much value beyond cash and industry-specific networking
  • Not as structured in their process and approach

The Why?

  • Wanting a mix of the flexibility and casualness of angel investors but want a bigger sum of cash

Choosing which way to go starts with educating yourself about the characteristics of each door. Educating yourself and comparing each fundraising option and knowing what your company needs will guide you in the right direction and hopefully the grand prize. We all have enough t-shirts!

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