Guide to Early Stage Investing, Investors, & More

Susan GuilloryUpdated January 9, 2023

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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.

Starting a business of any kind typically takes capital. While you might be able to get by on your own (or with the help of friends and family) in the very early phases of your startup, you may soon reach a point where you need additional funding. Raising capital from early-stage investors is one possible solution.Here’s a closer look at how this type of equity financing works, who offers it, and the pros and cons of bringing in an early-stage investor.

What Is the Early Stage of a Business?

The term early-stage is often used to describe a business in the pre-growth stage. Typically, the company has identified a product and its market and prepared a business plan, but still has limited (or no) revenue, sales, or market share. The early stage of a business is generally characterized by activities such as research and development, marketing research, and product development. It’s also sometimes referred to as the “seed” or startup phase of a business.

How Does Early Stage Investing Work?

Although there are many types of small business loans for established businesses, there are fewer options for a startup in the early stage because the business hasn’t proven itself yet.This is where early-stage investors come in. Early-stage investors are people or groups who provide startups with funding for their projects, typically when these projects are just beginning and are still in the market research or development stages. Early-stage investors typically provide enough seed capital to get a startup off the ground and to the point where they are either self-sufficient and profitable, or in a position where they have proven their business concept and can move onto another stage of funding (such as series A or series B funding).Early stage investors are willing to provide the funding – and take on high risks – in exchange for equity in the business. Depending on the agreement, the investor may also take a seat on the board of directors or otherwise be involved in decision-making for the company.Recommended: Pre-Seed Funding vs Seed Funding

Notable Early Stage Investors

Early-stage investors include angel investors and venture capitals. Here’s a look at some of the top early stage investors, according to Crunchbase.

Space.vc

With a focus on space technology, Space.vc provides capital for pre-seed to Series A stage startups. Some of the investments it has made include:

Hubble network
SpaceX
SpaceForge

Future Planet Capital

UK-based seed stage investors Future Planet Capital works with companies in technology and life sciences, and provides capital from early stage and seed to late stage. Some of its past investments include:

23andMe
Igloo
CellCentric

AENU

German-based early stage startup investors AENU also offers venture capital and late stage venture capital, in addition to early-stage venture capital. A few of their past investments include:

Responsibly
Nexgen
.planetly

GetVantage

Mumbai-based GetVantage provides venture debt for early stage startups, as well as non-equity assistance. Some of the investments it has made include:

Rage Coffee
Bold Care
The Healthy Company

Outlier Ventures

London-based venture capital firm Outlier Ventures provides accelerator capital, as well as seed and early stage venture capital. Here are some of its past investments:

CryptoAvatars
Kima
Superworld

Pros and Cons of Being an Early Stage Investor

Investing in early-stage companies comes with risks but also potentially high rewards. Here’s a look at some of the benefits and drawbacks.

Pros

If the early-stage business is successful, you could end up seeing a significant return on your investment.
Investing in a startup is a way to support entrepreneurship and help promote innovation.
Investing in an early-stage company can be an exciting and rewarding experience, since startups often have passionate teams that are willing to work hard to make their business succeed.

Cons

There’s a relatively high risk of failure. Many startups don’t make it, so you could end up losing your investment.
Being an early investor requires work – you may have to help the company with strategic decisions or provide mentorship.
New startups typically require a lot of funding, so you may have to invest a significant amount of money upfront.

Pros and Cons of Early Stage Investors for a Business

Pros	Cons
Can provide a much-needed injection of capital	Will need to come up with a company valuation
Money does not have to be repaid	Requires giving up some equity and control of business
Investors can provide guidance and valuable connections	Can be difficult to get

Recommended: Guide to Silent Partner Agreements There are also benefits and drawbacks for startups considering early-stage investments. Here’s a look.

Pros

Early-stage investors can provide the funding you need to get your company to the next level.
Equity financing generally does not come with any fixed repayment requirements. (There is an expectation of an investment return, but the return is generally expected five to 10 years in the future.)
Early-stage investors can often provide valuable business expertise and connections that can help you build and grow your business.

Cons

Bringing in an early-stage investor typically requires a valuation of your company, which can be difficult if you don’t yet have steady revenue streams or assets.
Early-stage equity financing involves giving up some ownership of – and control over – your business. In fact, you could end up owning a small percentage of your business after a few rounds of fundraising.
Access to this kind of capital is limited and often requires connections.

Comparing Early Investors, Angel Investors, and Venture Capitalists

Both angel investors and venture capitalists are early-stage investors. However, there are some key differences between them. Here’s a look at how they compare.

Similarities

Both venture capitalists and angel investors seek to get in on an investment opportunity in the early or seed stage, and both invest money in businesses in exchange for equity. In addition, both types of early investors tend to cater to innovative startup businesses, often those related to technology and science.

Differences

Angel investors are wealthy individuals who invest their own money into startup ventures, whereas venture capital investors often work for a risk capital company where they invest other people’s money. Another key difference: Angel investors tend to be more willing to take a risk on a startup that may have nothing more than an interesting idea, while venture capitalists generally want to see growth potential before getting involved.Venture capitalists also tend to invest larger amounts of money – and get higher equity stakes – than angel investors.Finally, angel investors typically prefer to be passive investors, whereas venture capitalists usually demand that they have some level of operational control.Recommended: 13 Ways to Fund a Startup

The Takeaway

As an entrepreneur, you know access to capital is crucial for growth. One way to raise funds during the early stages of your startup is to bring in an investor, such as an angel investor or venture capital firm. Early-stage investors can give you the capital you need to get your business to the next level, along with guidance. In exchange, you’ll need to give up equity as well as some control over your business.If you’re unable to secure an early-stage investor or aren’t willing to give up equity in your startup, there are other early-stage funding options to explore, including small business loans, crowdfunding, and small business grants.Recommended: Crowdfund Loans for Small Businesses

3 Small Business Loan Tips

Generally, it can be easier for entrepreneurs starting out to qualify for a loan from an online lender than from a traditional lender. Lantern by SoFi’s single application makes it easy to find and compare small business loan offers from multiple lenders.
If you are launching a new business or your business is young, lenders will consider your personal credit score. Eventually, though, you’ll want to establish your business credit.
SBA loans are guaranteed by the U.S. Small Business Administration and typically offer favorable terms. They can also have more complicated applications and requirements than non-SBA business loans.

Frequently Asked Questions

What are early stage investors?

What does an early stage investor typically look for?

What is considered the early stages of a company?

iStock/Jirapong Manustrong

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About the Author

Susan Guillory

Su Guillory is a freelance business writer and expat coach. She’s written several business books and has been published on sites including Forbes, AllBusiness, and SoFi. She writes about business and personal credit, financial strategies, loans, and credit cards.

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