The other types of new venture investors - it's not just angels!

What types of new venture investors are there?

Last week I wrote about the different types of angel investors. Today I will look at the other types of investors in the new finance market.

I am often asked by entrepreneurs where they can get money – thinking they might be able to snag an angel investor. The reality is, for most of these people, you won’t get an angel investor. 

Most entrepreneurs won't find an angel investor and that's ok.

The reason angel investors aren’t interested in a deal are numerous, but, for the people who ask me, its mostly because it is too early. Angel investors don’t need to see profit, but they do need to see sales and evidence of growth – they VERY rarely invest in seed stage firms. 

Talking about the other investors is important – it emphasises that angel finance is not the only source of capital for new firms. So I am going to identify the different types of new venture finance investors. 

Before I get to my charts, I should mention that as our markets develop and introduce new ways of doing things, we create new types of actors - like crowdfunders. We also create new (or at least highlight) perspectives. 

To help me create new venture finance archetypes, I first looked at the two predominant perspectives - investment and supporter. I based the charts below on these two perspectives. 

The investment perspective is an investor (of any type, not just angel) who invests money in the hope of a financial return.  

The support sees the financial contribution as being motivated by reasons other than a desire for a capital return. Interestingly enough, I am reviewing an article for a journal that categorises investor behaviour in a similar manner. They use ‘return’ and ‘passion’ as the motivators. Its always nice to know you’re not the only person thinking about this sort of stuff. 

A couple of things to keep in mind. Just like last week’s article, the ‘value’ of the investment is from the perspective of the individual ‘investor’, and post-investment involvement is just that. I should point out that involvement is direct, usually face-to-face, and occurs regularly. 

 Those who make a high value investment and have a high level of post-investment involvement are ‘traditional angels’, as I have discussed in this article.

The high value and low involvement is a passive investor. These people do exist, but they aren’t particularly valuable. I have run into them, and they often see a business that is doing well and want to buy in. The money isn’t often needed, and you won’t get human or social capital either.

Those who have a low value investment but get involved in the business are ‘sweat investors’. They don’t bring financial capital, but they do add human and social capital. 

Sweat investors are actually pretty useful, and I think anyone at the seed stage should be looking for one. Think about someone who has an idea for a new app, but not the capital or the know-how to build it. Rather than asking an angel investor to give you $100,000, try and find someone who already has the skills (in the case of an app, there are plenty of tech students at universities all over Australia). 

Finally, the low value and low involvement is what I call the passive crowdfunder. Because they don’t bring a lot of cash, there isn’t much value in having a single person in this category. Add them together, as crowd funding does, and you get a reasonable dollar investment. I don’t think there is anything wrong with crowd-funding in principle, but there are some regulatory issues companies need to know about. 

The first (and second) supporter is the philanthropist. These people commit a high value amount and can either play a very active role, or a minimal role. This type of funding is well-established in the not-for-profit sector and they are motivated to support a cause they believe to be important. 

The next archetype is the idealistic crowd funder – a relatively low amount but high post investment involvement. This could be testing products or supplying their network scope and individual expertise. They are supporting the firm not for a financial gain, but for altruistic motivation. 

Finally, the ‘gambler’ archetype. They are placing a bet on a particular firm and don’t take involvement. The gambler sees a company the think is ‘good’ (they believe in the product or service) and gamble that others will too. 

So there you have it, the different types of investors in the new venture finance domain.

I wouldn’t say one of these is the best type of investor, but I will say it is all dependent on where your firm is. If you’re at the seed stage – then you want a ‘sweat investor’. If you’ve got good networks and you want capital and perhaps a customer testing base (think minimum viable product), then the crowdfunder (preferably idealistic) is the best bet.