The Types of Investors Every Entrepreneur Should Know and Understand: Advice from Tyson Begly of Delta Data
My education and career background are pretty diverse. My undergrad at Auburn University was in Software Engineering, and I spent the first half of my career in consulting at firms such as Accenture. I was focused on technology, and my projects included private equity due diligence and trading compliance initiatives at a major Wall Street investment bank. I later went back to grad school at Duke, and I’m currently the CFO at Delta Data. I have broad experience with lots of investor types. Not only did I study Venture Capital and Private Equity from an academic standpoint while in business school, but I have real-world experience as well. I’ve borrowed money for a small business from both friends and family, was an MBA Venture Fellow, interned with a private equity firm, interned as a quant analyst for a $500B+ mutual fund investment firm, and judged the Duke StartUp Challenge. At Delta Data, I raised growth capital from a top-tier private equity firm based in Silicon Valley, and I’ve been working with them for the past six years as their portfolio company. I’ve also successfully borrowed and re-financed money from banks via credit lines, equipment financing, and general financing loans. Through these experiences, I have gained a good understanding of how the goals of the various investors differ and how you want to connect with them to raise capital. I’ve also been told “no” when trying to raise capital or borrow money, so I can empathize with that experience as well.
The Six Types of Investor Types Every Entrepreneur Should Know
For a new entrepreneur, it may be confusing as to which types of firms you should focus your time. It’s helpful to understand the goals and investment size of different investors to understand which investor type fits your capital needs. In general, the stages of investors change with the growth of the company. Here’s how I would classify the different stages/types of investors so you can see how they differ, and understand which ones are interested in your growth stage:
1. Friends & Family (and yourself): Friends & Family is definitely the most informal type of investor and are typically the first options for a lot of entrepreneurs. They aren’t investing in companies for a living, but they have some extra cash available, and they believe in you. They may not be professional investors, but you should treat them with respect as a formal investor. This means creating a formal business plan, a Pro-forma, providing updates, and honoring your commitment to them. Also, you should invest some of your own money to show that you also believe in the idea. Whether you are building a small business or a highly scalable start-up, Friends & Family is typically the first capital.
2. Angel Investors: Angels are the first stage of professional investors. Angel investors may be individuals or an “angel network.” Angel investors want to see businesses get off the ground and invest before the business is profitable. Since they are focused on early-stage, highly scalable startups, most of the investments will not be profitable. Angel investing may sometimes be more altruistic than profit-focused, which is why you see some cities, states, and schools arrange angel networks to incentivize entrepreneurs. Investments from Angels can range from $10k – $500k.
3. Venture Capital (VC): Venture Capital is a step up from Angel Investors in several ways: more stringent, higher financial expectations, more sophisticated contracts, and bigger investment checks. However, this is also the stage where the investor can provide a lot more help than just capital. While Angel Investors may focus on a location, VC investors are focused on industry sectors. This sector focus allows VCs to provide industry connections, strategic advice, capital advice, and more. You should also be picky if you are talking to VC investors, as there is a huge difference between average VC firms and successful VC firms. They should have several investments in similar type companies, and also several successful exits of their investments. You can judge this by the number of funds they have created and success stories on their website. To be clear, you want to find local Angel Investors, but the location of a VC investor is not nearly as important as their track record. If you are interested in VC or Angels, Venture Atlanta is a great event to meet investors. Investments from VCs can range from $1M – $20M.
4. Private Equity (PE): Private Equity has many similarities with VC firms. The biggest difference is that they are investing larger amounts of money and want to be more certain they will not lose money. They have a lot of money to invest from their limited partnerships (LPs), typically large institutional investors. Since they manage money for large institutional investors, they are less likely to take the big risks of early-stage startups like the Angel and VC investors. Most companies will raise VC money before they pursue PE money. Investments typically range from $10M to $500M.
5. Publicly Traded Stock: The goal for some PE-backed firms is to reach an initial public offering (IPO) and become a publicly traded company. After the IPO, the shares are publicly available to be traded by anyone over a stock exchange. Obviously, this is a whole separate topic, but worth mentioning to compare as an asset class.
6. Don’t forget about debt! Raising growth equity is fun and exciting, but it means you are selling part of your company to someone else. Debt is obviously the other option to access more cash, and could definitely be cheaper in the long run. You won’t get the advice of investors, but you will get to keep your equity. There are a lot of options such as loans and credit lines, and a banker can help you identify what is best for you. There are also convertible notes that are initially debt but can be converted to equity at a later date. This is a common instrument used by Angel Investors.
This is definitely a lot of information, and it can be overwhelming for some. I don’t think anyone can make a decision based on this brief information, but hopefully, you can have more specific conversations and understand the general direction to pursue. Just remember, an investor is buying a part of your company, so you should get as much out of it as possible. You need someone who has proven to make others successful, not just someone who can write a check. Raising capital is not something you should jump into without prior planning. Raising capital takes a lot of time. You should talk to others who have done it to understand the commitment, the terms, and expectations.
Tyson Begly is a seasoned business executive with 15+ years of experience in the technology sector with both financial leadership and software development management roles.
Currently, Tyson is the Chief Financial Officer for Delta Data, recognized as one of the Top 40 Innovative Technology Companies in Georgia in 2018. Delta Data provides back-end solutions that companies in the mutual funds industry use to process billions of dollars of transactions and keep on top of their data.
During his time as Chief Financial Officer, Delta Data secured a growth equity investment with Accel-KKR, the firm’s first institutional investment in the company’s 30-year history. Tyson also functions as “Operational CFO,” providing significant contributions to all strategic areas of the business. He works with other senior leadership to demonstrate ROI for their essential spend, benchmark their metrics against others, and identify the non-essential spend that does not support the bottom line. Tyson also articulates to the board, lenders, and audit teams how the financials reflect the current market and operational position, and also anticipated changes based on the company’s strategic direction.
Tyson has been continuously recognized for demonstrating a natural aptitude for spearheading process improvements, as well as for raising capital and bolstering investor relations, with a verifiable history of contributing directly to company efficiencies, scalability, and expansion throughout his career.