FRIENDS AND FAMILY
At the initial stages of a company, most entrepreneurs may obtain investment from their friends and family. These are known as personal investors.
Personal investors tend to invest their own funds directly into companies at an early stage (either the pre-seed or seed stage). Funds from personal investors may however serve as a propellent for attracting other types of investors for technology companies.
Personal investors are generally not involved in the day to day running of the business, as they may lack the requisite industry knowledge, skills, network or even interest.
ANGEL INVESTORS/ANGEL GROUPS/ANGEL SYNDICATES
These are usually high net worth individuals who invest in early-stage companies. They may invest individually or come together to form groups or syndicates to enable them participate in larger deals or to limit portfolio exposure.
Angel groups are usually formalised associations of angel investors whereas angel syndicates are more informal and consist of angel investors that invest alongside a lead investor. Angel investors typically invest relatively early in a company (either at the seed or the Series A rounds). The investment deals are usually structured as convertible debt, equity or SAFEs.
Angel investors may be affiliated - having a connection with the entrepreneur or start-up or unaffiliated - with no connection to the entrepreneur or start-up.
Angel investors often provide mentorship and advice to startups, in addition to financial capital. They may also be involved in helping the company to develop its business plan and marketing strategy.
VENTURE CAPITALISTS/VENTURE CAPITAL FUNDS
Venture Capitalists are institutional investors which invest their funds into start-up or early-stage businesses in exchange for equity stakes in the companies.
In a Venture Capital (VC) fund, Limited Partners commit capital to a venture fund and generally hold few obligations outside of their funding commitments. The general partners of a VC fund are however responsible for managing the funds.
VCs typically invest in companies that are in the early stages of their development. They tend to invest long-term and provide additional services to their portfolio companies including strategic guidance, connection to other investors, connection to customers, operational guidance, and support on hiring key personnel.
In some jurisdictions, VCs are regulated by the securities regulator or financial market/conduct authority in the country of investment and may require approval/authorisation/registration/licensing.
PRIVATE EQUITY FUND
A private equity fund (PEF) is a collective investment scheme that pools money from investors, such as institutional investors and high-net-worth individuals, to invest in private companies or acquire equity stakes in existing companies. These funds typically have a limited number of investors and are managed by private equity firms.
Private Equity (PE) investments are usually made into more mature or stable companies rather than early-stage companies like venture capital.
Similar to VCs, limited partners are the investors who contribute capital to a private equity fund whilst the general partners are the investment professionals or management teams responsible for managing the private equity fund and making investment decisions on behalf of the limited partners.
Generally, PE firms are not involved in the day-to-day running of the business, however they work closely with the management of the investee company to implement operational improvements to the business and cost cutting strategies to increase profitability.
PEs often aim to improve the business then sell it for a profit when the opportunity arises. They usually come with a fixed investment horizon (the length of time for which they will hold the investment) after which they exit the company. PE exits may be either by selling the company, through an initial public offering, by undertaking a strategic sale or even a through a management buyout.
PEFs are regulated in many countries. A few other countries however impose reporting and auditing obligations on them.
CROWDFUNDING
Crowdfunding involves the use of the internet to raise money from a large number of people. The pooled funds may be invested in technology companies either as debt or equity.
It is a method mostly used by start-ups and growing businesses. It allows such companies to reach a large pool of potential investors and is relatively easier than traditional funding methods which may require collateral or extensive due diligence.
Each investor will invest in the company by purchasing equity or debt securities or donating through an online platform that acts as an intermediary between the investor and the potential target.
Crowdfunding involves three entities; the target company, the intermediary (crowdfunding platform) and the backers (investors). When a company wants to raise funds through crowdfunding, it makes an application to the intermediary stating the type of funding (equity, debt, donation etc), the funding goal and the timeline and repayment method. After the application is vetted, it is uploaded on the platform and made available for backers to invest in.
Where the campaign goal is reached or after the stipulated timeline, the funds, which are stored by the intermediary, are transferred to the company after the deduction of processing fees for the platform. The platform would also issue the appropriate securities or instruments to the backers e.g. share certificates or convertible notes.
In Ghana, crowdfunding is regulated by the Bank of Ghana and the Securities and Exchange Commission (SEC). Depending on the type of crowdfunding being done a qualifying payment service provider (an enhanced payment service provider or a dedicated electronic money issuer) may need to partner with a licensed bank or specialised deposit-taking institution or an SEC licensed entity.
FAMILY OFFICES
A family office is a private company whose employees help manage a family's assets and needs. In conjunction with external investment experts, family offices often manage/oversee investments of the family by developing a well-balanced investment policy across asset classes, overseeing investment advisors and monitoring performance and risk. They may be a single family office (managing the assets of one family) or multi-family office (managing the assets of more than one family).
More recently, family offices have become increasingly prominent and powerful investors and accounted for almost one-third of all capital invested in start-ups globally in 2022. They may invest through debt (and are investing more in private credit) or equity (and are increasingly investing in private equity). They may invest directly or through venture capital funds.
In terms of equity investments, family offices usually exit through trade sales, strategic sales, share repurchases and public offerings.
INCUBATORS AND ACCELERATORS
Incubators are a collaborative program for startup companies — usually physically located in one central workspace — designed to help start-ups in their infancy succeed by providing workspace, seed funding, mentoring and training over a span of time.
On the other hand, accelerators are short, intensive programs that provide education, resources, and mentorship for early- or mid-stage founders.
Investment by both incubators and accelerators may be by equity, debt, convertible notes or SAFEs. In some cases, they also connect the start-ups to potential investors. Generally, where the incubator or accelerator has an equity stake in the company, they are involved in the management of the company through taking up appointments on the company's board.
GOVERNMENT AGENCIES/PROGRAMS
Governments can play a key role in financing of technology companies at different stages of growth. Funding may come in the form of loans, grants or equity investments. Equity investments are usually done by financing intermediaries such as special purpose vehicles. Government loans are usually granted through specialised agencies or programs created for that purpose. Examples are the Small Business Administration (SBA) in the United States and the YouStart Initiative in Ghana.
The eligibility of a start-up for any of these funding forms differs from one government (or agency) to another. However, there are some key factors that may be considered including the industry, innovativeness and necessity of the product offered.
BANKS AND FINANCIAL INSTITUTIONS
Banks and other financial institutions can invest in start-ups through debt (usually called venture debt). Banks loans present an attractive source of capital since companies would have access to large capital without having to part with ownership of their company.
In recent times, banks have been more open to funding start-ups and many now have products or programs specifically tailored to start-ups. For example, Qonto is a digital bank started in France to streamline banking services for start-ups and smaller businesses. Debt provided by banks and other financial institutions usually attracts interest and, depending on the risk involved, may require the provision of collateral by the borrower.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
