What Type of Investor Do I Need?

Recently I wrote about the importance of finding “smart money” instead of just seeking a capital investment from anyone with a checkbook.  This brought up a great topic which is what type of investor should I have invest in my business?  After you receive all the money from your friends and family, who do you talk to now?

The first question to ask yourself is what kind of partner do you want? Before deciding, it is important to know the differences in investors, for example, an angel investor vs. an institutional investor (venture capital and private equity). There is always the option for a bank loan or to use debt financing, but I am going to focus on angel investors vs institutional investors.

A key difference to consider is that the angel investor will typically make a maximum investment in the thousands whereas the institutional investor will typically invest in the millions.  So depending on the amount you are raising in your round will play a big role in the investor you should seek. Another key difference is that the angel investor primarily is using their OWN money to invest in your company, where an institutional investor is using a fund comprised of a number of investors both individual and commercial. Because of this, the angel investor invests with more emotion and is more concerned with helping build your business than getting immediate return so they will typically offer better terms. It is also important to note that If you are a start-up company, institutional investors are less likely to invest with you.

Although both types of investors are concerned with their ROI, in my experience, angel investors fill a “mentor” role in the business. Institutional investors are typically more structured and demand monthly financial reports, require the creation of a board of directors (they typically occupy a seat), and create strict milestones which determine their future involvement in your business.

Angel investors will get involved very early-stage (pre-revenue), and sometimes even before your product/service has been validated in the marketplace. The angels will focus more on the business subjectively (founder expertise, market fit, etc.). Institutional investors typically will only invest after the company has proven its business model and has a reasonable pipeline of customers and prospects.  This type of investor also focuses more objectively by closely monitoring metrics such as revenue run rate, ARPU, LTV, ARR, etc.

Finally, it is important to understand the business model of the institutional investor vs the individual angel investor.  As an example, the VC model is dependent on the “home run”.  It is truly an 80-20 rule (or even 90-10) whereas 80-90% of their return is generated by fewer than 10-20% of their portfolio companies.  The majority of their investments either fail or create a modest return. This is why famous entrepreneurs like John Mackey of Whole Foods refer to VC’s as stated below. 

If I can help you better understand which investor is best for you, please reach out to me.