24 Apr Six types of investors and something more
I recognize I am an irreparable reoffender! After the success of 5 types of entrepreneurs I have launched myself pitiless against investors.
Let’s not fool ourselves, as much as we paint them as perverse and evil, we need entrepreneurs, without them companies like Apple, Dropbox, Skype, or LinkedIn would not exist.
You can read this post or listen to a more extended version in podcast format. You can find my Podcast sin the following plataforms: iVoox, iTunes, Spreaker, SoundCloud and for the ones that like to read here is the post!
Before speaking about the 5 types of investors, I will make a short preface talking about some divisions more orthodox than mine. The first division is about where the money invested comes from:
- Private/Business Angels: The money comes from their pockets (this is me), therefore you can expect that they see the company with a magnifying glass because their money is at stake!
- Family Office: As the name indicates their money usually comes from their family, or sometimes many families get together to take more critical mass. They tend to be colder investors than Business Angels (that shiver easily with numbers) and they take more chances if they see that the project is worth it.
- Venture Capital: They are investment fund partners, the money is not theirs, they are professional investors, sometimes they participate in the fund they invest for. They will analyze the investment in an absolutely professional way without any adherence or hindrance.
We should also distinguish between Analyst vs. Investor. Analyst is the young person who is sounding the market and makes us the first call to see if we are interested and/or asks us a lot of numbers in the first meeting. The investor is the one that comes later, once the ground is prepared and starts asking the questions that hurt and makes the decision of taking us to the Investment Committee. Yes, Investment Committee, in many funds the decisions are not made by one person but by a committee.
Until here the more or less orthodox divisions, before the 5 types I have another division, in function of control level:
- Invest & Pray: Literally invest and pray, tends to be an investor that has such an invested company volume that almost has no time to come to the administration board, nor even look at the reporting you send them. They do not control anything.
- Control freak: This is the opposite side, they ask you a special reporting with its format, you have to make constant special meetings with them to see the subjects in detail.
In the middle of both there are fortunately the most investors that tend to ask for reasonable things.
And now here there are the types of investors that you are most commonly going to find, though there are others.
Usually has gotten to this status by the stratospheric company selling. This is the type of person that does not walk, levitates… and are often dressed in an eccentric way; if you see them they remind you of a rock star, sometimes not for their clothing but by their diva attitude.
Come down to earth! They will not listen to you unless you have a business plan of a million zeros in an area hyper-super-hot. They tend to invest really high amounts of money even though the business bills zero, if they like you, you are really really lucky!
They are what the name says; someone of banking that invests in companies. There are the ones that know about startups and technology and the ones who do not. Anyway they are careful and analytical. In most of the cases they co-invest with someone that has analyzed well the business from the market’s and technology’s point of view, minimizing the risk.
There is the modality of the ex-investment banker, that is to say someone that proceeds from big firms in the investment banks that has moved to the investment of startups. To this one all numbers seem small; from where they come the minimal investment in order to not lose time was 200 million euros. And you are here asking for a million. Taking away this small exception of size they tend to be super professional analyzing the company and the investment.
This is the one most frightening to me because the business plans always have errors. I had an investor in NTR that was this way, every Direction Committee was terrifying, I could find a mistake on a transparency number 3, that was combined with another one of transparency number 26 and we would waste an hour figuring out where I came from… despise these bad times they are the investors that have helped me the most in my life and the ones I am most fond of.
Another case are the ones I call “Metric Freak”, in 2006 some investors from New York came to see me and they hit the biggest metric’s review of my life, silly me, who thought had everything under control. I spent an entire month excel up excel down making half the company dizzy asking for the numbers they were demanding. There is where I learned what MRR was, the Vintage Analysis or the LTV… among others…
Personally this is the one I less get along with, basically because they type of industry I usually am in is Software as a Service (SaaS). It is to say renting the software instead of selling it. What happens with the Saas? The initial inversion is higher because, being a rent, the income takes longer to generate, the bright side is that when the company already has critical mass it is super stable and predictable, and much more valued.
As long as you are in Saas you are lost. The conservative rather have 1M€ with ebitda of 10.000€ than 10M€ with negative ebitda of -1.000€. They are afraid of all the money the company has to burn before the break-even point.
They impress, know about your sector more than you, not in vane they have analyzed 20 companies like yours. They know all the metrics, know the competitors and destroy the first version of the business plan in a stroke. But if they sit down with you and are interested, they will ask you for a new one with the changes.
Particularly this is an investor that I love, even though sometimes they demand a lot or I have to justify everything very well. Their critical eye will help you get well prepared and focus well on things.
It seems like a lie but they exist, fortunately there are not many, they are the exception. A couple of years ago there were more, but the area has professionalized a lot. Although some of the “bio tech” have informed me that there are still some that try to jump from one area to the other and of course, bytes and molecules are not the same.
To finalize the best advice I can give as an entrepreneur, if you can (because many times you cannot) choose an investor with which you feel comfortable and have chemistry.
Why? Because you will not know them safely until they are in, if they like the company they will put themselves in sell mode and you will never know how they really are… it is best if you have good chemistry. But do not complain! You as an entrepreneur do the same… you try to dazzle the invertor with all your charm. And this happens in every aspect of life, there are people that stay in sell mode until they marry… that is why there are so many divorces… but that is another post…
And to end a question, what type of investor do you prefer?