Knowing your angels from your VCs: All you need to know about investors

It is critical to identify who you would want as an investor, and if their investment philosophy matches your company’s goals.

Type A: Angel Investors
An angel investor is one who could have invested in startups through venture capital funds but has decided to invest on his own. He could have been an entrepreneur earlier or a businessman/woman or a senior professional.

They believe they can pick winners: An angel investor wants to invest in a business he understands and can contribute to. An angel network works on the same principle-collectivelydeciding on investments with a couple of members involved with the startup.

Do not have hard exit timelines: As it is their individual money, angels are not working with a hard timeline for exit. While they are looking to exit and recover their investment, they are not as rigid as VC funds that work with fixed fund tenures.

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Watch out for Angels looking to get a side entry into a business: Sometimes angels are looking to invest in companies to manage themselves and see investments as an easier way to start. Watch out for angels looking for chairman positions, taking decisions on yourbehalf, etc.

Type B: Venture Capital Funds
Venture capital funds are portfolio managers who have raised money from investors for a specific investment mandate (for instance, to invest in technology startups) and for a fixed period of time.

Funds look for a 10x return potential company: This is a crucial investment requirement
for almost all VC funds as they need to pick out companies that have the potential to return up to 10 times of the investment made over a 5-7 years time. VC funds are looking at a portfolio approach and are expecting some of the investments to go bad and others to make up for them.

VC money is time bound: The key driver behind the VC investor’s focus on exits is the primary mandate of any VC fund, which is to return the money to their investors after a fixed period of time.

Watch out for VC s looking to run your company: The primary approach of VC funds is to invest in a portfolio of companies for a strong return on their overall investments. Be wary of VCs who think they need to get involved in each company’s internal working to help them grow.

Type C: Strategic investors
A strategic investor is a large corporate looking to invest in startups either related to its current business or ones they wish to enter into.

They are primarily looking for a good fit for their current or future businesses both in terms of the business idea and the execution capability of the team. Most strategicinvestors can also explore investing at the incubation stage if they see potential for the business to grow.

Invest where they can benefit the startups through network and sale introductions: If astrategic investor invests in a related business, it is best poised to open doors for the startups, both in terms of connections and sales leads.

Watch out for slow decision makers: Unless there is an explicit policy to invest in startups, strategic decision-making can be painfully slow especially in older and larger firms. Smaller and new companies are better strategic investors as they are able to take decisions quickly regarding the investments and subsequent introductions into the network.

Ensure you talk to the right set of investors instead of going for umpteen meetings with very little progress after several months on the road.

The author is founder, Idyabooster and a seed and angel stage investor.

This article first appeared in Entrepreneur India magazine.