We’re currently experiencing a second gold-rush in startup financing. In the first two quarters of 2015 alone 1,661 startups were funded with a total of $27.6 billion in venture capital deployed. So, if you have an entrepreneurial spirit and a good business idea, it’s natural to wonder what exactly these venture capitalists are looking for in their investment opportunities. That question is best answered with a brief explanation of the broad categories of investors and at what point in the life of a company they make their investments.
Angels
Angels are typically high net worth individuals (or not even so high net, but usually accreditedinvestors, i.e. a net value of $1 million-plus) that look to invest in fledgling startups. Angels range from informal groups of friends and family members (where the phrase “F&F Round” comes from) to serial investors who may work for venture capital firms or be officers or founders of successful tech companies.
Angel rounds typically raise tens of thousands to low hundreds of thousands of dollars. Normally, angels are introduced to companies via personal networks and are looking to invest in individuals or teams that show high levels of personal promise - at this stage, ideas and business plans are important, but as the saying goes, no battle plan survives contact with the enemy, and no startup business plan survives contact with the market.
Any startup will go through many iterations of its business plan and changes of direction, commonly called ‘pivots,’ where it may reassess its core ideas, product offerings and monetization strategies. As a result, these very early stage investors invest in the individuals behind a company as much, if not more, than the particular business strategy, as they know the business itself will evolve greatly and the team needs to meet the demands of change. At this point, investors look for a driven, brilliant team, ideally composed of individuals with experience-based insight into particular market sectors.
Accelerators and Incubators
As an alternative to seeking angel investment, some entrepreneurs, especially inexperienced ones, may choose to apply to an accelerator or an incubator. The value of the companies which were invested in by Y Combinator, the most famous accelerator (they now technically call themselves a seed fund, though they were a pioneer accelerator – more on this below), is well into the tens of billions and includes cloud giant Dropbox, alternative lodging site Airbnb and payment processor Stripe, and hundreds of others.
So how does an accelerator work? Typically, young entrepreneurs — and by young, I mean young, including many kids of high school and college age, with the top of the curve peaking in the early-30s age range — apply to the program with a pretty elaborate description of their business plan, team, and a demonstration app or clear product concept. Accelerators look for young, bright people, typically with technical skills, that they feel have the ability to actually execute the technical side of the startup, but are inexperienced in more areas of business.
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