Greed or Fear: What Really Motivates Investors Understanding why investors put money into businesses can help you figure out who to approach and how to go about it.

Over the course of building my business, I've raised money from many different types of investors: venture capital firms, small investment firms, wealthy angel investors, angel groups, private lenders, and relatives and friends. I've seen first-hand how greed and fear sometimes motivate investors to behave in irrational ways. Learning more about these motivations can not only help you raise money, but also help you better manage your investors and understand the human side of financing a startup.

For this column, I'm going to focus on two significant financial resources: venture capital firms and angel investors. When I was younger, I was told venture capital firms invest out of fear (losing the deal to another firm) and angels invest out of greed (making more money than their friends). I've come to learn this is a gross oversimplification.

A venture capital firm consists of individuals who make investment decisions with their own interests and their firm's interests at stake. Reputation matters a lot--the reputation of the firm among its peers, the reputation of the partner or VP who is proposing the investment to colleagues, and the reputation of the firm among limited partners such as university endowments and private funds that capitalize the venture capital firm. As the theory goes, it's reputation that makes venture capital firms fear losing a deal--that is, an opportunity to invest in your company--to another firm that's also competing for recognition in the industry. While there's some truth to this, I've found venture capital firms are driven by gut instinct, cold hard business fundamentals and fear--in equal doses.

So what does that mean for you? Gut instinct--when you're on the "wrong" side of it--is irrational and unpredictable behavior. VC partners often will pass on a deal because it "doesn't feel right," even if they think the business opportunity is sound and they might lose the deal to another firm. I've seen venture capital firms change their mind at the last minute--even after shaking hands and celebrating a negotiated set of terms. Entrepreneurs are justified in feeling betrayed and frustrated by this type of behavior. But it's important to remember you have little control over individuals who hold the purse strings and make decisions based on gut instinct.

Something you do have more control over are good business fundamentals, which are necessary to entice venture capital firms to own a piece of your company. For large VC firms, the market opportunity for your company's product line needs to be large enough to support a billion dollar market capitalization in the future. A few hundred million used to be large enough; now a billion is the target. In addition to a large market, VC firms typically like to see some combination of other strong fundamentals, such as sustainable competitive advantage from unique technology or relationships, proof of concept, experience management and a growing industry category.

Seek out venture capital firms with consistent interests and behavior that can coach entrepreneurs to grow the business and increase shareholder value.

On the other hand, the best angel investors are those that keep out of your way--for the most part--and provide counsel and contacts when asked. Angels, as the moniker suggests, make investment decisions with an interest in helping you succeed, not just achieving financial objectives. While the greed of earning a very high forecasted return on investment is often considered the primary driver, I've found the motivation to get involved with a company has more to do with a mix of bragging rights and vicarious fun than simply forecasted investment returns.

For wealthy investors, there's a benefit in being able to tell their friends and relatives about how they've put some money in a startup venture with an intriguing business model. There's nothing shameful about bragging rights; it's an understandable and real part of the motivation of investors--something you should remember when pitching them. For more on this topic, see " The Fine Art of Meeting With an Angel Investor " and " Categorizing Your Investors ."

Angel investors also like to live vicariously through entrepreneurs, many being former business owners themselves. The Global Entrepreneurship Monitor studied the backgrounds of angel investors and found that these individuals are predominantly male, former business executives with previous entrepreneurial experience and a high net worth. The extent to which the investor understands your product and has had previous exposure to your industry is among the most important factors in determining if they'll invest in your company or pass on the deal. Greed is only part of their motivation.

For many investors, their decisions are based on more than merely making money. The better you understand some of their typical motives, the better you'll be able to pitch your business--and work with them once they've signed on.