Steps to Growth Capital Self-Study GuideStep 6

6.3 What Type of Investor? What Type of Investment?

Depending on your business's stage of development, certain sources and types of financing are more common. Generally, projects in the early stages of development tend to be the riskiest. Then, as the product gets closer to being marketed, the lower the risk and the faster the profits can be realized. Here are the different stages of business development to see the types of investors and what investments they typically attract.

Learn more about the different types of investors:

• Founders and Angels
  
• Corporate and Institutional Investors

Debt or Equity?

You, and your investors, must choose what type of investment is best for your circumstances. Of the two basic types of financing (debt and equity), risk capital investors generally prefer equity financing. Rather than placing their money in more traditional, safe investments (like mortgages, term loans, and so on), they look for growing businesses to invest in. Why? The reasons are varied. Some like to be more involved with their investments. They may enjoy the excitement and challenge of actively helping a young business grow. They may believe in the product or service. And of course, as you saw in Step 1, they are interested in the higher rate of return offered by this type of investment.

Some risk capital investment comes in the form of subordinated debt, in which the rate of return is affected by the performance of the company. Again, this type of investment offers higher rates of return than traditional ones, such as term loans.

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