Tuesday 14 September 2010

Investors invest in different stages

I'm mentoring at Seedcamp in London. I learned that a lot of first time founders don't understand at investors invest in different stages.

Angel investors are weathy individuals that invest small amounts of money in business that they (generaly) understand. Commonly they invest in packs (5, even 10 at a time). It's usually in a very early stage, paperwork is simple and idealy at least some of them bring more to the table than just money. They bring experience and network. Typically an angel round won't be enough for the company to bring it to profitability, but it's a great start.

Incubators are quite common organised as a small fund and their main advantage is networking. I actually think that accelerator is a better name. They'll invest a small amount of cash, but mainly they'll bring in mentors and primarly network. Examples would be Seedcamp, Y Combinator and others.

Seed stage VC are smaller funds that behave as a proper VCs, give relatively smaller round, but big enough to take the company through the first year. The paperwork is already annoying. Quite often they have really cool partners that understand early stage risks. You can always call them for advice or opinon and often you'll get great feedback. They are not a lot of them, but those who are, are absolutelly instrumental for a success of a small early stage firm. Guys like First Round Capital, Union Square Ventures or The Accelerator Group are in this league.

Later stage VC tend to be more about money than anything else they won't invest less than a properly sized A round (typically 5mio usd). They have the whole infrastructure in place, controllers, annoying lawyers and everything else. They don't invest in early stage first time founders.

So know in which class the person you're pitching too falls into.However there is a small trick. Investors know each other. They talk. So, if you're pitching an early stage startup to a late stage investors,do it properly, you never know with whom he'll have a lunch after your meeting.

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