The Three Type of Investors You Should Watch Out for When Raising Funds
Each kind comes with its own particular mission, so you should really strive to understand who you are dealing with
Though there are a wealth of resources that give advice to entrepreneurs in the Asia-Pacific region on how to fundraise, most do not go into detail about the different goals of venture capitalists. They give tips on how to create the perfect pitch deck for investors, or what terms you should ask these investors for, or when you should try to close your investors. The operative word here is investors.
Even if they may have dramatically different goals, most resources still blanket all venture capitalists into a single, monolithic bloc of “investors”. This oversimplification does a disservice to founders, who would be set up for more successful relationships with their investors if they knew more about their distinct goals.
To wit, there are three main types of investors, including financial, strategic, and social impact investors. Each investor type comes with its own particular mission, so you should really strive to understand who you are dealing with.
Strategic investors are usually large corporations that want to invest because they see the startup’s technology aligning with the company’s long-term direction. A bank, for example, scanning the horizon for fin-tech startups would count as a strategic investor - they’re willing to back these companies for the strategic value they may one day provide. The same goes for an online marketplace investing in a chatbot startup, or a resto chain backing a food delivery startup.
Since strategic investors are already established companies, they can provide you with the vast resources of a corporation, in addition to domain-specific expertise. Entrepreneurs who are considering working with strategic investors should weigh these opportunities against the backdrop of the larger picture: Do you see yourself aligning closely with the strategic investor’s goals? Those who do would be well-served to fundraise from them, while those who do not would be wise to overlook the allure of their immediate resources. It’s just not worth butting heads over strategic direction in the future.
Financial investors are the most common in the startup and tech ecosystem. They want to invest in high-growth startups that have a potential to yield a high 10x, 100x type of return, usually via acquisition, and in rare cases, via initial public offering (IPO). Entrepreneurs who also want to work toward an exit should partner with financial investors, who can help accelerate you toward that liquidity event.
Though flashy headlines may make all the headlines, there is still the rare breed of founder who truly wants to solve a problem or innovate their space. They may not be willing to rest - even with the promise of a cash windfall - until they accomplish what they set out to do. They may be less aligned with financial investors, who may pressure them to take an exit should the opportunity present itself. So while financial investors may not force you to compromise your vision, they may shorten the window in which you can achieve it.
Social impact investors
Social impact investors back ventures that serve the social good. This altruism can be broad, such as supporting ventures that employ and upskill underprivileged workers, or it can be very specific, such as backing startups that target particular United Nations sustainable development goals for 2030.
It’s important to note that social impact investors do not invest as an advocacy - they also want to see a return. Entrepreneurs should only seek backing from social impact investors if they are ready to be held to both standards, which is no easy feat. Social impact investors are less partial to the typical startup exit, but they do want to see healthy financial metrics, if only because profitability will ensure that the social mission can be served more sustainably.
A final word
If you’ve ever taken a personal assessment like the Myers-Briggs Type Indicator, you’ll know that people don’t fall into neat categories - they are instead a combination of different profiles. In much the same way, investors can fall into multiple categories. An Internet service provider backing a startup with mesh technologies that can provide Internet access to unconnected, off-grid communities would be both a strategic and a social impact investor, for example.
Since investors will usually be multiple types, entrepreneurs must discern what their most prominent attributes are, so you can seek after, pitch to, and negotiate with them using appeals tailored uniquely to them. You’ve only got one shot, after all. Why not make it count?
Mark serves as a Partner at Rocket Equities, a strategy and M&A advisory focused on Asian startups and SMEs. With a degree in chemistry and material science engineering, Mark loves working with e-commerce and fin-tech companies while creating strategic partnerships in the ecosystem.
He is currently pursuing his CFA degree.