What Are The 3 Types Of Investors?
Investing isn’t just for people with loads of cash, nor is it reserved for stock markets and blockchain. Investments include personal savings, insurances, and assets, and they’re not exclusive to just very wealthy people! Everyone can—and should—be investing.
The first step to being an investor is understanding the stages of becoming an active investor. Not everyone gets to this stage, but those who do are generally categorized into three types: personal investors, angel investors, and venture capitalists.
Knowing the stages and types of investors is essential, not just for people who are diversifying their portfolios. It’s also crucial information for people who do business with investors, such as startups, or anyone else thinking about starting a business.
The Stages Of Being An Investor
There’s an investor in all of us. And all it takes to awaken that financially responsible mindset is financial education. Here are the stages each investor goes through to realize that:
Pre-Investor
Everyone starts as a pre-investor. It’s a stage characterized by a lack of financial knowledge or motivation. A pre-investor doesn’t know about investments, or if they do, they are unaware of how to transform capital into assets.
The financial world of a pre-investor is usually characterized by high consumption and little savings, prioritizing lifestyle over long-term financial security. That said, it’s easy to advance yourself from the pre-investor stage by learning more about personal finance and how you can grow money based on your needs and capacities.
Passive Investor
A passive investor is someone who employs financial planning—a simple approach to maximize returns on capital with minimal risk, including investing in real estate, retirement plans, asset allocation, and savings. If done early, passive investments may be enough to guarantee a comfortable lifestyle later in life.
This stage is the starting point for financial security, and it’s ideal for people who are too busy to focus on actively investing, such as those with demanding jobs, families, or other interests.
Active Investor
An active investor takes a more hands-on approach to investing. They take the time to research the market, as well as different investment opportunities. They’re like passive investors, except they don’t leave their capital to the market’s movement. Instead, they’re able to make calculated moves to protect themselves from possible losses through learned skills.
Active investors make sure that their money is working for them. Their financial decisions are specifically aimed at ensuring they receive high returns later on.
Three Types Of Active Investors
Active investors differ in the capital they’re willing to invest, their strategies, and their motivations. Startups need to know the types of investors they might encounter and that they’ll likely need to help get their business off the ground.
Personal Investor
Most startups begin with support from personal investors: family, friends, and acquaintances. These people are easily accessible, but the capital is limited. Plus, it requires careful documentation and legal counsel to make sure these agreements are free of complications.
Angel Investor
Angel investors are usually wealthy entrepreneurs, business professionals, or industry insiders who want to leverage capital by investing in startups with high potential. Sometimes these startups are still in startup incubation, which is defined as companies still in incubator programs. These business angels make substantial investments in the hopes of receiving significant returns if or when a startup is acquired or goes public.
Though angel investors are usually independent, some pool their capital together and act as a group to buy larger chunks of a startup.
Venture Capitalist
A venture capitalist (VC), who can be a well-off investor or a partner in a financial institution, invests significant capital in startups with long-term growth potential. They’re similar to angel investors, but they’re more selective. VCs often secure startup shares, giving them the right to make decisions, take up positions, etc. That said, VCs often offer mentorships to help the growth of startups they’ve invested in.
How To Find The Right Investors
The best way to find the right investor for your startup is to know where to look. Many investor databases provide information for you to expand your network, opening doors to potential investors.
If you’re wondering which investor to trust, consider relevant factors beyond just capital. Ask yourself: can this investor provide value to the startup? Is this investor what we need at this stage of funding? Does this investor have a good track record? Make sure that your decision is aligned with your plans for growth and success.