How to Find Angel Investors: A Guide for Entrepreneurs
Here's your comprehensive guide on how to find the right angel investors, from initial research to follow-up.
5 min.
When you venture into the world of entrepreneurship, you embark on a journey filled with innovation, risk-taking, and potential. As a founder working to breathe life into your vision, one question inevitably arises: "How do I get the funding to launch and grow my startup?" The truth is, there are a plethora of different types of funding for startups. Each startup funding option comes with unique advantages and considerations, depending on what you're building and how you're planning to grow your business. From tapping into personal resources to attracting angel investors, venture capitalists, and even harnessing the power of the people through crowdfunding, the world of startup funding is diverse and ever-evolving.
In this comprehensive blog, we delve into the diverse landscape of startup funding, breaking down each type of startup funding, how it works, common sources of startup funding, pros and cons of different types of funding, and critically, tips to pick the right one for you. More specifically, you'll learn:
Whether you're taking your first steps towards a minimum viable product or gearing up for growth, understanding the different types of funding for startups is the key to unlocking your startup's full potential. We'll be your guide as you explore the realms of self-funding, angel investment, venture capital, crowdfunding, and more. Discover the financial fuel that powers the startup dreams, and gain the knowledge you need to navigate your way towards entrepreneurial success. Let's go.
There are a wide variety of different types of startup funding; today, we’re going to be focusing on 10 of the most common types of funding for startups.
Please note, we make a distinction between types of funding, and sources of funding. In this article, “type of startup funding” refers to the capital itself, while “sources of startup funding” refers to where the capital is coming from. Sometimes, the names are the same, but many times, they’re not.
So here are 10 common types of startup funding:
This type of startup funding is all about leveraging your own resources to fuel your business at the beginning. In most cases, a founder will invest their own savings or earnings into the business to get it off the ground. As the business grows, it uses its own profits to keep scaling.
Some self-funded businesses may also be "side hustles". That means that the founder has another job, and uses the money they earn in that role to fund their new endeavor. That doesn't mean that the business is less serious or that the founder is less committed; it only means that the founder is choosing to grow the business in a specific way.
While this path is challenging, it offers unparalleled advantages, such as complete ownership and control over the startup's direction, and the opportunity to reap all of the benefits of its success. Bootstrapping naturally encourages resourcefulness, solid operations, and prudent financial management. Being constrained by budget may initially limit growth potential, but it provides a solid foundation to attract external funding or even exit in the future.
Some blogs refer to the Pre-Seed stage (more on that below) as the "bootstrap" stage. At Chisos, we look at bootstrapping a little differently. Our perspective, based on conversations with founders, is that bootstrapping is a longer-term decision about how to fund a startup. In our experience, founders who choose to bootstrap intend to primarily self-fund, and focus on using the business’s revenue to fuel future growth.
This type of startup funding comes from a founder’s friends and family members. Basically, it's when a founder asks their network to back their business. It’s sometimes referred to as “love money.”
Sometimes, these agreements are formalized, and sometimes they're a little more informal. This could look like debt, equity, or a hybrid. (We’ll treat each of these individually later in the article.)
This type of startup funding generally involves raising a little bit of capital from a lot of people via an online platform like WeFunder (equity crowdfunding) or Kickstarter. In most cases, a crowdfunding campaign solicits investment from the general public, including non-accredited investors. In addition to providing capital in the short-term, crowdfunding can be powerful evidence of traction for later-stage raises.
Depending on your offering, crowdfunding can be an option. Be warned though: it’s really difficult to crowdfund. Anyone looking at this route as “easy cash” should probably reconsider.
Angel investment is a type of early stage startup capital that typically comes from a wealthy individual, or angel. These affluent angel investors invest their own money into early stage startups in exchange for equity.
In many cases, angel investors are passionate about supporting entrepreneurs, and they believe in the potential of innovative ideas. In addition to providing financial backing, angels often bring valuable expertise, industry connections, and mentorship to the table, which can be as meaningful as the funds themselves. Startups fortunate enough to secure angel investment gain access to a wealth of knowledge and guidance from seasoned professionals, accelerating their growth trajectory. However, angel investments also come with the trade-off of diluting some ownership as investors acquire equity in the company.
Angel investors may join groups to access deal flow, as they're often looking outside of their own personal network for opportunities to invest. That means that entrepreneurs seeking an angel investment must craft compelling pitches, and be resourceful in how they get in front of individuals or groups of angel investors.
Venture Capital, or VC, is a type of equity-based startup capital that comes from a venture capital firm. Often referred to as VCs, venture capitalists typically invest large sums of money in exchange for equity. It is one of the most highly publicized forms of startup financing, and is designed for high-growth startups. (Most of the name-brand startups you know were VC-backed.)
In the most basic terms, this arrangement typically looks like a venture capital firm offering a certain amount of cash in exchange for equity ownership in your business. Venture capital firms are looking for fast growing, tech-enabled unicorns. They need the company to reach $100 million ARR in 5-7 years in order to justify $1Bn+ valuations and exits. VC is only right for very quickly growing companies addressing huge markets.
While VC funding is essential for the startup ecosystem, it’s really difficult to secure. The truth is, less than 2% of startups will receive VC funding. It’s a difficult path that’s definitely not for everyone. (That’s part of why we believe the startup world needs new funding options!)
The reality is that most new businesses aren’t a fit for venture capital - but that doesn’t mean they’re not worth building or that they won’t be successful.
These are programs that provide startups with access to information, mentors, and sometimes even funding to help them grow and succeed.
Know that not every accelerator provides startup funding. That said, participation in a prestigious accelerator or incubator can make it easier to raise capital from other sources in the future.
Grants are a unique type of funding opportunity for startups that come without the burden of repayment or equity dilution. Unlike traditional financing methods, grants are provided by government agencies, non-profit organizations, or foundations to support startups that align with specific missions or address pressing societal challenges.
While the application process for grants can be competitive and time-consuming, the rewards are substantial. Beyond financial support, grant recipients often gain credibility and recognition, which can open doors to further funding opportunities and strategic partnerships. For startups aiming to make a difference while preserving full control of their venture, grants can be an avenue worth exploring.
This is one of the most traditional types of capital: a bank offers you capital and you agree to pay it back with interest. The trouble is, this type of funding is typically only available after you’ve been in business for 1-3 years, and often requires some kind of hard asset as collateral. For most early-stage startups, this isn’t really accessible. For some businesses with existing cash flow or hard asset collateral (i.e. inventory/machinery/etc.), an SBA loan is a low cost source of growth capital.
Another common way that startup founders fund their businesses is through personal debt. This might look like taking on a personal loan, or using a high-interest credit card. While it’s helpful in a pinch, this can be expensive capital.
This is a fundraising method for startups in the cryptocurrency industry, where investors purchase cryptocurrency tokens in exchange for funding.
A wide variety of new financial options are emerging, which can help founders access capital in ways that are more flexible and more aligned to their current growth stage. Debt-equity hybrids are a type of startup funding that combines elements of both debt and equity financing. Convertible notes are one common type of debt-equity hybrid; revenue-based financing is another. Chisos Capital’s CISA is another example.
A convertible note is a debt instrument that can be converted into equity at a later date, typically when the company raises a round of equity financing. Convertible notes typically have a lower interest rate than traditional debt financing and provide the investor with the option to convert the note into equity at a predetermined price. This type of financing allows startups to raise capital while delaying the valuation of the company until a later date when more information is available.
Another example of a debt-equity hybrid is revenue-based financing. In this model, the investor provides funding in exchange for a percentage of the startup's future revenue. This model combines elements of debt financing, as the investor expects to be repaid over time, and equity financing, as the investor shares in the future success of the company.
Chisos’s Convertible Income Share Agreement is one of these options; it’s a dynamic blend of an Income Share Agreement and a SAFE. You can learn more about how it works here.
But that’s just one option. There are a variety of non-dilutive capital options, too, and unique types of “AltVC” or “FlexVC.”
Alternative approaches and hybrid investment models can be useful for startups that aren’t yet ready to raise a traditional equity round, or have struggled to raise equity-based financing, but still need access to capital. However, it's important for founders to carefully consider the terms of any hybrid financing arrangement and ensure that it aligns with their long-term goals for the company.
It depends on the type of business you're building. Different types of funding may be more appropriate for different stages of a startup's growth, and each option comes with its own advantages and disadvantages. There are pros and cons of different startup funding options; as a founder, part of your job is determining the funding path that’s right for you.
Funding rounds are typically defined by the stage of a startup's growth and the amount of money being raised.
There is no standard definition for funding rounds, but here are some common terms used to describe the stages of startup funding.
Keep in mind that these stages of funding are typically used to refer to VC fundraising. Definitions and terminology used for funding rounds may vary depending on the region, industry, and specific circumstances of each startup.
In recent years, the size of the round has increased significantly. In the past, a pre-seed round was typically up to about $100K; these days, a pre-seed round can be millions.
That said, these rounds are almost always raised consecutively, regardless of the round size. That means that even if you manage to secure a $2M pre-seed round, your next round will be a seed round, even if you raise $10M.
In the past, founders expected to raise additional rounds every 12-18 months; in today’s fundraising environment, we’re expecting those durations to stretch out. After years of free-flowing capital, we think it will be important for founders to stay lean, maximize runway, and focus on growth.
With those basic things in mind, let’s learn a little more about what they mean.
Pre-Seed is typically the first stage of building your business. It’s sometimes referred to as the “acorn stage” or “pre-revenue funding.” “Angel” refers to a specific type of investors, and these so-called “angel investors” are typically active at the pre-seed stage.
During the pre-seed stage, your company is pre-traction and you’re likely raising capital on the merit of your idea, the potential market, and often, your personal brand and relationships. You have a firm idea, and you’ve probably tested it somewhat, but you don’t have an MVP of your product or paying customers.
Few VCs or banks will provide capital this early. (In fact, DocSend refers to the pre-seed round as the “gateway round” for future VC funding.) Instead, you’re likely looking at angel investors, cash from friends and family, or self-funding with savings and credit cards.
It bears mentioning that a handful of startup capital providers will provide capital at this early stage - including Chisos! More on that later.
Startups at this stage are typically trying to raise up to a few hundred thousand dollars in capital.
This is your first “official” fundraising round. At the seed stage, most startups are raising capital while building their MVP, finalizing business plans, zeroing in on product-market fit, and everything else it takes to get ready for launch. At this stage, a startup may already have beta users or some evidence of traction, but that’s not necessarily required.
What is required is that there is clear evidence of growth potential, team productivity, and customer interest.
The money you raise during the seed round will likely be spent building your team, and developing real traction. Series A investors are going to be looking to see that you hit your growth milestones. (Later investors typically see your ability to successfully define and hit growth targets as evidence that it’s worth putting more proverbial fuel in the tank.)
There are VC investors and other investment firms that specialize in the seed round.
At the seed stage, most startups are raising in the low millions. However, as we said at the top, the size of rounds are increasing and that number can be much higher.
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By your Series A round, you’ve proven product-market fit, you’re hitting your projections, and you’re ready to begin to really scale. (At this point, you need cash to grow, not to figure out if you can grow.)
Your goal during this raise is to show investors that your startup has serious scalability and long-term profitability potential.
In recent years, the Series A round can be in the $20M range; Crunchbase reports that the global average Series A is $18M, and the median global average is $10M.
After your Series A round, your goal is to deploy capital and achieve that elusive “hockey stick” growth path. Series B investors will look for that kind of growth to justify the investment in this “growth stage.” At the Series B stage, you’re looking to continue developing your product offering, capture more market share, and establish yourself as a leader in the space.
Your Series B raise can range anywhere from $10M - $100M (and even this is a loose range).
Frankly, very few companies make it this far! If you do, kudos. Because you’ve proven yourself, different and more established investors are likely to be interested.
At the Series C stage, you’re still looking to continue improving offerings, enhance your team, and scaling up. Depending on your business, that might look like reaching new markets globally, building new products, or even acquisitions.
This round is bigger, typically above $40M. In recent years, the Series C round can be hundreds of millions of dollars.
Not every company will raise a Series D round; in many cases, the Series C will be enough to reach global scale or even IPO.
Raising a Series D or E round can be a sign that the startup has struggled to achieve its goals. On the other hand, some startups see an opportunity that would help them have a more successful IPO, and may raise a later round to activate it.
Every round past Series D is decreasingly common, and also tends to be perceived poorly. But like all other guidelines, there are exceptions.
The IPO, or Initial Public Offering, is a major milestone. This is where a company transitions from being a privately held company to a publicly traded one. It can be used to generate funds, and it’s also a stage where founders may exit.
At the IPO stage, you need to keep your focus on growth, while also showing that you’re a successful, stable company. No surprise then that going through an IPO requires a significant legal and corporate governance effort.
These stages of startup funding typically correlate more closely with product development and sales growth, rather than the amount raised.
While there are a lot of different ways to articulate this, here at Chisos, we really appreciate Village Capital’s VIRAL growth pathway.
Here’s how you can loosely connect your fundraising stage to the product stage:
We’ve published a wide variety of resources about how to find investors for your startup. We outlined 7 simple steps, and we also shared a list of high-quality investor databases.
Here are three of our favorite startup investor databases:
Drop your email here to get access to the complete list of startup investors.
It’s always challenging to raise capital, but even more challenging for individuals pursuing non-traditional career paths. Artists, athletes, makers and creators need capital to launch their careers, but funding options are few and far between.
Our sister business, INSPIRR, offers a streamlined pathway for individuals to raise funding from their network to pursue their dreams on their own terms.
Not all entrepreneurial endeavors look like being a founder, and that’s okay.
We provide financing to early-stage startups with our unique investment approach, the Convertible Income Share Agreement. It's a type of debt-equity hybrid.
With this model, we invest in the individual and their business. This allows us to invest in founders at earlier stages, as well as funding businesses that wouldn’t be a fit for traditional venture capital. Chisos also prioritized impact; more than 70% of our portfolio is founders from backgrounds that are traditionally overlooked or underrepresented in the startup ecosystem.
We invest in pre-seed, seed, and early-stage companies in a variety of industries, including software, consumer products, and healthcare. Our typical investment ranges from $15K-50K, and we take an active role in working with our portfolio company founders to help them grow and succeed. We provide mentorship, strategic guidance, and access to our network of investors and industry experts. Our goal is achieving long-term success and positive outcomes for everyone.
