Does it matter who invests in the seed stage of a startup?
As with many aspects about business and entrepreneurship, there is no clear ‘yes’ or ‘no’ answer to this question.
It depends on a number of factors. In the formative stages of the venture entrepreneurs should ideally seek investors who can provide experienced perspective that will help the startup take better-informed decisions.
Also, because in the seed-stage the venture is likely to be still ‘experimenting’ with a number of aspects of the business — pricing, product features, operational aspects, marketing & sales programs, etc. — it is important to ensure that the seed stage investor understands that some of these experiments will work, and some won’t. I.e. you want your investors to be supportive of your experiments, and comfortable with some of them not working out.
At seed stage you need investors who are empathetic about your aspirations and wishes, and who are aligned to the direction you are taking. You need investors who will allow you to chart the course of your venture’s journey, even if they provide an experienced perspective. On the other hand investors who are determined to influence your decision making to ensure that their investment is safe are likely to be a challenge to manage.
Strategic investors (i.e. individuals or companies whose business can benefit from your venture’s success. e.g. a pharma company can be a strategic investor for a startup that is building a community of doctors) can be a good option, but can also be a double edged sword. For strategic investors often the reason to invest in a venture is the value they will derive from the venture’s success (as explained in the example above). However, if the venture decides the pivot, or alter the model, the strategic investor may quickly lose interest. Also, sometimes a strategic investor, who is also a potential customer, can make it difficult for the venture to get other customers who the strategic investor may be competing with.
However, often entrepreneurs are unlikely to be in a position to be picky and choosey about who the investors will be.
Any case, even if the entrepreneur does not have a choice, and his her/his back to the wall and needs the money desperately, I urge entrepreneurs to not take money from someone who you are not comfortable with. Having a good chemistry with your investors is, as you can imagine, very important for peace of mind.
Connect with me on LinkedIn on https://www.linkedin.com/in/prajaktraut/ if you have comments or questions about my views in this article or any of my other posts.
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