I get this question. a lot.
This question partly comes from entrepreneurs trying to understand the mindset of the Investor to pitch them appropriately. The expectation is that there is a single answer. There isn’t.
You see, there are very many kinds of investors, in reality.
Here are roughly the kinds, you’ll encounter.
- Family Offices
- Limited Partners
- High Networth Individuals
- Venture Capitalists
- Angel Investors
- Retail Investors
Depending on which one of these folks you are engaging with, you’ll get a slightly — or very — different answer.
Foundations are looking to do good. It is usually the CSR (Corporate Social Responsibility) arms of a larger business and they are looking to contribute (as a grant) to Non-Profits and social enterprises. While the intention is to do good, the marketing teams would want to get some RoI out of it, so they would look for areas where their business can look good. For eg., a beverage company might give grants to non-profits and social enterprises in the water conservation space.
Philanthropists are similarly intentioned — in the focus, i.e non-profits and social enterprises, but they do the writing of cheques from their own personal accounts. There are some genuinely good people out there, writing big cheques. The goal here is legacy — these are folks who have achieved “success” in business and life and want to be known for something other than that beyond their lifetime.
Retail Investors are individuals who are investing in stocks, markets — any form of assets and the intention is simple — RoI. And that too RoI within a timeframe. Nothing else really matters. They are asset class agnostic and wouldn’t flinch to invest between stocks or real estate or startups.
Angel Investors are of two kinds — and also depends on where their money comes from. There are angels who invest out of the funds from the Family office, and their intentions are slightly different. We’ll talk about Angel Investors who are investing their own capital — in which case there are two kinds. One is looking to build an alternate asset class (and will build a portfolio) and the other is an operator who is looking to stay fresh by investing in some early-stage startups and being involved to stay current.
High Network Individuals are folks who are focused on a business (which is their primary cash cow) and have wealth. Maybe even made a recent exit. They are usually taking 3–4 meetings a day with all sorts of folks — including wealth managers in banks. Their focus would be to preserve the newfound wealth and grow it. They are looking for ways to grow the money, but not with too many risks. So there will be some strategy to put a bit all over the place and constantly tweak it.
Family Offices are trusts that are set up — usually by a family business. This is one of the most common forms of aggregated wealth in a country like India. There are roughly around 1700 Family offices in India — the Daburs, Ambanis, Tata & sons, etc. The New class of entrepreneurs would love to get into this clique, but that old money likes to keep them out. The wealth is kept in a trust that manages the various subsidiaries, and the members of the family make calls on how to grow the wealth. There is usually one person (who understands startups and managing a portfolio) who is delegated the task — and hence the reason when you meet an Angel investor you need to understand if they are managing their own money or representing the family office. For a Family office, they will want the individual to come and present to the board of trustees before deploying capital. Family offices have one goal — to beat inflation to ensure that the wealth they have accumulated isn’t eroding. There is also the matter of timing. Not every investor wants RoI in a time-bound manner, in-fact family offices are the opposite. Ideally speaking they wouldn’t want the money back soon. When money returns, it attracts taxes and such — which is another form of erosion of wealth. The intention of Family offices is to grow wealth and transfer it to the next generation. For short-term investments (7–10 years) their goal would be that the asset class beats inflation + capital gains. In the long run, rollover funds are what they would like to be part of — as long as risk is mitigated.
Limited Partners are predominantly of two categories — Sovereign Funds (say a country has a Pension Fund, or Insurance fund — like LIC) and they have the money with them but would like to grow it beyond fixed deposit rates, and Family Offices. They invest in Venture Capital funds to achieve their goals. They would not invest directly in any startup, in that role. If a family office has become an LP, it is essentially delegating the task of deal sourcing, paperwork, and portfolio management to a third party because they don’t want to be burdened by it.
Venture Capitalists, manage the money from Sovereign Funds and Family Offices (with a small percentage from Retail investors, including their own money — up to 10%). They are managing someone else’s money in a time-bound manner and has to give returns of at least 20% IRR, within 7 years on a portfolio level. It isn’t as easy as it sounds.
You might be frustrated about the countless meetings you take to raise capital — if there is anyone who understands that well, it is a VC. They’ve done that, except that most of the folks they raise money from are also experts in ghosting. Trust me, they get your pain.
As an entrepreneur, knowing what the expectations are from the source of the money, will make your life so much easier — and in attracting it in the first place.
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