Investors come in all shapes and sizes, just like startups. Angels are often the first to take a chance on a fledgling company, writing checks normally in the sub-one million range. If you’re in need of more funds, traditionally speaking, venture capitalists are the next on the line. They can provide a larger sums of money to get your business off the ground. However the last decade has witnessed the rise of new investor types gushing into the space. While some are “tourist investors”, they come and go. Some are here to stay.
Venture Capital
But let’s talk about venture capital first. Typically, a venture capital fund is a closed-end fund with a vintage year and a fixed term (most commonly 10 years). Within this ten years, normally the first five years are defined as “the investment period” focusing on deploying capital (including follow-ons). The last five years are dominated with exit activities. The economic model of a VC fund includes the management fee (2%) and manager carry (20%). The venture capitalists get paid (I mean really get paid) when exits happen.
The fund structure and economic model together determine that a VC investor is looking for high conviction deals with an investment period of 3 – 5 years. They typically also want more control of a company so that they can influence the direction of travel of the business. So this translate to board seat(s) (sometimes one board seat and one board observer).
Active or Inactive
Before speaking to a VC investor, it is important to research whether the fund is “actively” deploying capital. VCs that have already fully deployed and haven’t raised a new fund yet have no capital to deploy quickly. Whereas those seating on significant dry powers might be under pressure to invest.
Generalist or Specialist
Generalist funds invest in everything innovative or disruptive. Specialist funds are the ones focus on a niche they know very well. Generalist funds are often the big players who can afford to have a number of sub-funds with different themes. You might receive less operational support from a generalist funds as you are just one of their many babies. On the other hand, a specialist fund could be smaller in size which means they might not have the capital to follow on or top up.
Passive or Agressive
There are funds who’d like to take a significant stake of the company (more controlling) and there are funds who are willing to tag along and let the management team run the show. This is usually easy to spot in early conversations when funds talk about their investment styles.
Current investment sentiment in VC is generally “wait and see” for scale ups (Series B and above). Series A investments are slightly dampened but overall in line with prior year. Seed and pre-seed stage are barely impacted from both volume and valuation perspective, which is not surprising. It is like buying an out of money option – limited downside + massive upside.
Corporate Venture Capitals (CVCs)
The last decade sees the takeoff of CVCs. And they are here to stay. Large corporates now fully recognize and embrace the idea that innovation is the main source of growth.
They provide much needed capital, expertise and network to startups, enabling them to accelerate growth and disrupt markets. They are the driving force in creating a vibrant ecosystem of corporate-startup collaboration.
From a startup perspective, the upside of partnering with a CVC is that 1) they are strategic investors and see things from a different perspective. For this reason, they can be more generous when it comes to valuation and investment terms; 2) they can add massive commercial value by providing brand recognition, distribution platform or R&D resources; 3) Sometimes they can be your exit partners. It is not uncommon to see a large corporate buyout a startup entirely when it has seen sufficient evidence of potential.
Family Offices
Thanks to the ubiquitous internet, family offices as a secret group now come to the spotlight. The explosive wealth creation in the past two decades also created many new family offices featured by tech entrepreneurs and finance whales. It is natural that a successful entrepreneur, from traditional industries or digital age, is willing to back future generation of entrepreneurs.
The investment thesis and investment style of a single family office is a reflection of its principal and it is often deeply influenced by the wealth creation process of its principal. For example, if the principal created its wealth from building and scaling an international e-commerce platform. Then he or she is more inclined to invest in platform type of business because they understand what a successful platform looks like
Family offices are a close-knit group that best goes by referrals. But if you don’t have a rich friend, you can still bump into them at major startup conferences. The world is flat.
Business Angels
Business Angels are typically wealthy individuals who are looking to invest in start-ups and small businesses. They are usually experienced entrepreneurs or executives who have the knowledge and expertise to help the business succeed. They often provide valuable mentorship and guidance to startup founders and can help them make important decisions. Business Angels are usually looking for a long-term partnership and are willing to provide ongoing support.