There are some tech companies out there who will never need to raise money. By virtue of their particular company dynamic, they’ll bootstrap their way to success and never look a single investor in the eye. For many startups however, at some point, they will need to seek out someone else’s money and begin navigating the complex world of investor relationships.
Money isn’t all the same. It may look the same when being swiftly siphoned from the company bank account on office rents, staff costs and marketing, but one check can come in with very different expectations and requirements attached than another. The question is what suits your startup better, searching out a few large institutional investors, or a series of smaller investors?
THE LARGE INVESTOR
The level of value an investor has does not always equal the size of their check. It’s hard not to look at the zeros and make that mistake. After all, money adds instant value to a company. It may not provide mentorship or leadership, but it does keep the lights on and doors open, which is fundamental to running a business.
Traditionally, larger investment firms have a plethora of portfolio companies. While their business is, of course, about making returns and achieving growth, it is also predicated on mitigating risk and this is achieved by backing potential winners across a swath of industry sectors.
While this approach means daily catch-ups aren’t likely, being one of many can be appealing to startups as it adds a form of security as well as passivity. While there may be casual assertions of providing hands-on guidance, more often than not, with large investors, startups are on their own.
Having said that, in a recent move spearheaded by Andreessen Horowitz, some of the larger firms have begun programs whereby they provide a series of services to their portfolio companies ranging from HR services, to legal counsel. The underlying logic surrounding this is that, the lower the startups’ operating costs in the early days, the better chance they have of survival and, ultimately, seeing success. Service offerings like these do give large investors a competitive advantage as it simply isn’t feasible for smaller investors to offer these types of programs.
THE SMALL INVESTOR
More so than their institutional counterparts, small investors are prone to feeling the pressures of risk and so it is that when a larger investor also chooses to buy into a startup, it is often news which is well received.
Once the larger investors are in, small investors can become the engine room of the startup. While their impact typically gets diluted down over time, in the early stages, they are commonly willing and able to immediately offer mentorship services, expertise and their networks to the startups.
Typically smaller investors are investing in a company because they understand that marketplace as experts. They have experience and understand what it takes to get from step A to B. Although larger investors will commonly use their network and influence to forward one of their investments, this will typically take place in later stages.
THE BEST OF BOTH WORLDS
The majority of startups end up with a blend of both small and large investors and this is often the most ideal situation as they work very differently and yet with a common goal. Large investors are able to open doors down the road for startups, providing credibility and growth opportunities, while smaller investors are more capable of adapting to the changing whims of a startup and the marketplace they are entering. When startups need to pivot and require cash to get back on track, often times it’s the small investors which can quickly inject the necessary survival capital.
While startups may not always have investors queuing at their door, wherever possible, for entrepreneurs, it’s worth evaluating exactly what various investors bring to the table and if the real value they could provide goes beyond the numbers on their check.