Investors don’t think like most people, says Inga Veselova, Managing Director of Velvet Investment, because they don’t have the mindset of people living from paycheck to paycheck.
Their mindset is to use their capital to invest, either short term or long term, to make a profit. Many investors have the end goal of becoming wealthy, but there are also many investors who use their capital to invest in order to fulfil their dreams or to bring about a change in the world. There is also a lot of planning that goes into investing and risks such as the loss of capital when an investment goes south.
What drives investors
There are many reasons for investors to focus on investment in startups, such as gaining capital and the feeling of having done something good, or helping someone they feel should be supported.
Inga, having worked with many startup investors, says that many aren’t in it for the quick buck. They prefer to make long term investments for greater success and a higher possible return.
“They are driven individuals,” she says “and when they feel that it is the right opportunity for them, they will most probably jump at the opportunity to assist the startup.” There are many ways of offering assistance to a startup, such as financial investment and advice, as well as providing connections.
Investors want to see a startup succeed when they are invested in the business. They want to see a large return on their investment, rather than that fabled quick turnaround, and they can assist the startup with succeeding by creating collaborations and giving business advice.
There are two types of investors, according to Inga. The first type of investor is a person who has themselves, been an entrepreneur and so knows the pains of starting and running a business. The second type of investor is someone who wants to see startups succeed and jumps at the opportunity to invest and offer assistance.
Who usually invest in startups
Angel investors
These types of investors usually invest in startups and are for the most part entrepreneurs. They tend to offer monetary assistance in the early stages of a startup.
Some characteristics of an angel investor are:
- They are usually a wealthy individual
- They have an entrepreneurial background
- They are looking for a hands-on investment
- Usually not afraid to be the first to step in and invest money
Angel investment first emerged around 20 to 30 years ago and has only gained momentum and legitimacy over time. An angel investor is someone who invests in a business in the early stages. These types of investments are of course risky as the failure rate of startup companies is high.
“Angel investors are usually those who are entrepreneurs and know that early investment can help the success of a startup,” says Inga.
There are multiple things that attract angel investors, like a passionate team who wants to make it happen, a good idea, and future growth opportunities. Usually, Angel investors need to see clearly the potential of the business case before they invest in a startup. Angel investors offer financial assistance, and also their entrepreneurial expertise.
Venture capitalists
There are also venture capitalists (VC) who also invest in the early stages of a startup – only if they show proven traction. Venture capitalists are different from angel investors. Angel investors make use of their own money to invest in a startup, but venture capitalists make use of other people’s money – money they receive from donors or third-party investors.
Some characteristics of venture capitalists are:
- Institutional money, provided by the partners
- Are interested in long-term investments
- Usually only interested in a certain industry in a certain region
- An appetite for high returns
A VC is a private equity investor that provides capital to startups with high growth potential in exchange for an equity stake. Venture capitalist firms are usually structured as limited partnerships where the partners invest in the VC fund. Such a fund normally has a committee that is tasked with making investment decisions. They make these decisions based on how strong the management team is, the potential within the market, the uniqueness of the product or service and whether they see the company as having a competitive advantage.
This means that a VC usually wants to see the business plan and a prototype of the product or service the business plans on selling. A business plan is important mostly because it gives the VC some insight into whether the startup has a realistic view of the business, its own capabilities and weaknesses, and the market.
Normally a VC is not as personally invested in a startup as an angel investor. The VC will have a person on the board of directors to oversee that all processes run smoothly, but they won’t necessarily intervene and help make decisions. They are interested in businesses that have set business goals and plan to show future endeavours.
Why investors are necessary for startups
“Nowadays, some investors will invest time, on top of money, into the startup they have chosen,” says Inga, “although this is not true for all investors.”
That is because startups function differently from a company that has existed for many years. Usually, startups don’t have a set structure and this leads to employees doing all sorts of tasks that they weren’t necessarily chosen for.
Investors, with their extensive business knowledge, can offer structure to any startup. They do this by building communication with a team and being part of daily operations. This helps a startup develop processes and a daily routine to ensure that all tasks needed are done and nothing falls through the cracks.
Providing leadership is also an important part of an investor’s contribution to the startup. They secure connections and ensure that the startup has what it needs and takes to succeed.
It can take a long time for a business to be profitable and of course, investors normally invest in a startup for profit. Therefore, they tend to stay with the startup until the business is successful enough for the investor to make that profit. Sometimes, depending on the reputation and success of the business, investors like to stay on to keep offering advice.
This journey can take seven or more years until the startup reaches a phase where the investor can make a good exit. This is also dependent on the type of startup and whether the products or services of the startup fit well within the market.
What attracts an investor to a startup
“Attracting an investor isn’t a black and white process,” says Inga. According to her, investors look for different things and this is dependent on their personality.
Though, there is one thing that they all have in common. They ask the question: “can I make money with this idea?”. Investors are also interested in businesses that already show some sort of success, whether through pilot projects or industry success.
“Some investors are simply in love with the idea that the startup has, and see the potential around it. It could also be that they already have a roadmap in their head to build the success of the startup, and know exactly what needs to be done,” says Inga.
Some investors, she continues, are attracted to the dedication of the team or how the business operates. “One thing that early-stage investors usually overlook is the financial forecast,” says Inga.
This is because startups cannot usually concretely predict the amount of money they will need or will make. The startup has no previous data to look at when making predictions, and they simply use numbers based on the expenses they have incurred.
When a startup attracts the attention of an investor in its early stage, it means that the investor is interested in the startup and will help the startup succeed.
