The 9 Categories of Seed Investors

For startup entrepreneurs — especially first-timers — that are just getting started on the journey of raising seed capital, the process can be daunting.  How do you talk to an investor?  How do you determine what investor is right for your business?  There are lots of questions and few great answers.

In an effort to help, I’ve created profiles for different types of seed investors.  Along with a brief description of who the investor is and what they bring to the table, I also thought it would be helpful to note what to consider when talking to this type of investor.

Keep in mind that a person could fall into more than one of the categories below, but based on my experience — there’s usually one dominant category for each seed-stage investor.  So without further ado…

The Industry Expert

This investor may not be a celebrity to the average person, but in your industry — she’s pretty darn close.  The Industry Expert built their wealth by spending a good part of their life in the very industry that you’re trying to innovate.  As a result, they have a ton of institutional knowledge and could likely give you the same amount of information in a single brain-dump session that you would take months to get on your own.  They can open up doors to you — and can be a great investor to have.

Just remember that…

Because the Industry Expert has spent so long in their industry, they could have a tendency to fall back on the “but that’s not how it works here” mantra.  Then again, if this type of investor is investing in your company, it’s probably because she thinks that her industry needs the type of innovation that you’re bringing.

The Business Model Expert

Like the Industry Expert — the Business Model Expert has a lot of knowledge to share with you that can be useful.  While it’s true that their success came from outside of the industry your startup operates within, they’re very familiar with the type of business you’re building — and have the battle scars (and trophies) to prove it.  They can be instrumental in the “business building” aspect of your startup, and they’re likely intrigued by the prospect of helping tackle an entirely new industry.

Just remember that…

The Business Model Expert can bring a lot of value to you, but you probably know more about your industry than they do.  They can be quick to make judgement calls about your industry that might not feel right to you.  If this happens, you might want to trust your gut and make the call that feels right.

The Startup Community Leader

While their name might not not be David Cohen or Mark Suster, in your hometown startup community, this investor is a celebrity.  He’s earned the respect of other angel investors and entrepreneurs — and when he talks, people listen.  He may have had success as an entrepreneur himself and generally has insightful thoughts to share — but he also brings value in making local introductions for you.  These introductions could result in additional local investors and even business development deals.

Just remember that…

The Startup Community Leader, while helpful — especially if you’re trying to close a mostly local round of investment — is not a savior.  Having him as an investor won’t “make you” as a startup, and he — like anybody else — is human.  Don’t take 100% of what he says as gospel.  You will still have to determine what feedback to take and implement, and what feedback to consider for the future.

The Grizzled Veteran

The Grizzled Veteran has been there and done that before.  This investor invests in startups because…well…startups is all she knows.  She’s started (and exited) multiple companies and now likes to invest in entrepreneurs that might remind her a bit of a younger version of herself.  She’s friends with lots of other Grizzled Veterans and can be a great sounding board for you — through the good and the bad times.  She may even be considered by many as a Startup Community Leader.

Just remember that…

The Grizzled Veteran likes to invest in what — and who — truly interests her.  If you’ve been hounding this person for the longest time to take a meeting or to invest and she hasn’t yet pulled the trigger, it could simply be that she’s not that into you (in an investor/entrepreneur way, of course).

The “Bet on the Horse” Investor

This investor won’t be the type that says that they invest in “people.”  This is because he’s really just interested in the industry you’re starting a business within.  He’s made a strategic choice to invest around this industry, and thinks your startup could be “the next hot thing.”  Becasue he’s invested in other companies that are in the same realm, he has a lot of data points in this market — and can offer you very interesting perspectives as a result.

Just remember that…

Because they’re not betting on “the jockey” — he may not care as much about your personal development as an entrepreneur.  Don’t get me wrong — he still believed enough in you to invest in your company.  But if you’re looking for a mentor-type investor, he might not give you what you need.

The Venture Capital Seed Investor

Just as the name suggests, this isn’t an individual angel investor — but an institutional fund.  In fact, this VC actually has a fund specifically geared towards seed rounds, and likes to sprinkle smaller amounts across many different startups.  They’re not asking to take a Board Seat yet, but that’s mostly because they’re not quite sure how much time they actually want to spend with you yet.

Just remember that…

There is a difference between institutional groups that were purely set up to invest in seed rounds — and big institutions that happen to have an arm that invests at the seed stage.  The first is making a strategic decision to invest at the earliest stages.  They may not have the interest or ability to invest in later rounds — but they’re very interest in helping you get started.  The latter is simply buying an “option” to invest in your next round of funding.  Of course, this means that they think you’re pretty interesting — and see you having a shot at making to that next round.  But if you try to raise that next round and this investor doesn’t invest, it could raise a lot of questions with other potential investors.

The Angel Fund

This isn’t a specific investor — but a collective of investors.  This group might have a committed fund that they invest from, and all of the individuals within the group contribute to create this fund.  Similar to a Venture Capital firm, the decision to invest is often made through a due diligence process that a smaller committee is in charge of running.

Just remember that…

Despite the word “angel” within the name, the process for this group investing in you feels a lot more like “venture capital firm” than it does angel.  There could be many hoops to jump through just to even have a chance to present to the group — and even if there’s a positive vote, due diligence can be brutal.

The Friend or Family Member

If an investor doesn’t fit into any of the categories above — they probably fit into this one.  They might be successful in their own right, but probably haven’t invested in a ton of startup companies in the past.  That said, they’re impressed by you — and want to see you succeed.  Keep in mind that this person might not actually be your friend or family member — but is likely connected to you through one other person and has heard good things about you from them.

Just remember that…

if they are related to you, you might see this person at Thanksgiving.  Be prepared for family events to turn into quasi Board Meetings.  Take extra caution with those that haven’t invested in any companies before.  In fact, do your best to almost convince these people not to invest.  It’s a fine line, but you want to do what you can for this investor to be sure that he knows what he’s getting into.

The Pretender

This investor is actually not an investor at all (despite what his Twitter profile or speaker bio says).  At first glance, this person might look like a Grizzled Veteran or Startup Community Leader — and they sure like to talk about all of the companies that they “advise” and invest in.  But when you prod and dig in a bit, you realize that there’s actually nothing there.  Sure, there are those companies that he “advises” — but the last true investment made might have been years ago, if that.  This person can waste a lot of your valuable time, so do your best to quickly ascertain whether somebody is a legitimate investor, or if they just like to act like one.

Based on your experiences, are there other investors that I’m missing?  Do you have a great description of another type of investor?  Feel free to share in the comments below.

 

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  • Based on feedback I’ve received, I’d add a 10th to the list: The Crowd

    With services like Kickstarter and other crowdfunding platforms, “the crowd” has become the newest investor type of our generation. The best thing about “the crowd” is that along with their investment comes actual customer proof points, given that “the crowd” is a group of customers themselves. Another great thing about “the crowd” is that their investment can often encourage other investments, as it’s a great signal.

  • Stefan Bogdanovic

    I really like the way you have talked about the investor types. First, I can tell that the author (You) has experience with almost all of the types above and second, there is that “blunt” language that you use – the one that everyone could easily understand.

  • The Pretender! Yes, my favorite and makes up a good size of the population.

    • That moment when you realize as an entreprepreneur that you’ve been talking to a “Pretender” = a sad, sad, day. 🙂

  • Industry expert investors are best. They usually become partners and customers as well.