I always hear big sites have their own investors... but how does it work?

Imagine you have a great idea for a site (or a site already running) and you want to find an investor to put money into your idea... For example, free sites such as Digg.com and stumbleupon.com both are fueled by big investors... but how does it actually work? I have a few questions (hopefully not too stupid) regarding this....

1) Where to find such investors? Are there actual people looking to invest their money in web projects?

2) What does an investor expect in return? Imagine you have a web project, but you're not on any stock market with your project (or not yet...). What are the advantages for the investor? How does he earn his money back?

3) What exactly does a site do with the money they get from an investor? They spend it on advertising and employees and such?

4) What if the project fails? Is this a risk an investor takes, that he could lose his money?

5) Do you know any other, small and big sites, that are sponsored by an investor?


Discuss

 

Hi...I think big fish come after the great site running means your idea must be proven first

 

Websites, like any venture takes money to make happen.

The catch-22 for folks is that in order to get an infusion of investment money, you already have to be making money or demonstrate the potential and plan to make money. A rule of thumb for angel investors/venture capital is that they typically want to see at least a 20x-30x return on their investment within 5 years. Additionally, these investors seldom enter the scene until, like I said earlier, you're already on your way up. That means you've exhausted other sources of early funding (friends, family, and the fools who are stupid enough to invest in an unproven concept). It's important to note that when you bring on an investor, you give up a percentage of ownership of the company, which also means you give a share of the say about how things are run.

Investment money should be used to help the company grow and get to the next level - more servers, more programmers, etc. In the 1990s there was a problem with startups taking their investment money and throwing parties and buying expensive chairs and offices. You don't see a lot of that anymore because it's unacceptable to the investors.

And yes, if you go under, the investors lose their money. The thing is, you should have already invested enough time and and your own money (or your parents' money) that'll be a lot bigger of a deal to you.

And for your information, you should read up on the history of Digg. The company was started without investment money. It was only after they scraped it together and started getting big that they raised their first round of venture funds.