Why People Invest In Startups

I joined SeedInvest two years ago as the first investor-focused full-time hire and since then, I have watched our investor network grow over tenfold. Describing that network has always been a challenge because it can only really be done in broad strokes. The reality is that general categories such as geographic breakdown, industries of interest, and historical investing patterns, while practical for “speaking” purposes, do not do justice to the diversity of our investors. Such generalities also fail to convey the level of granularity required to manage our investor relationships.

No Two Investors Are Alike

While not quite as diverse as snowflakes, very few investors are exactly alike. Some invest on their own behalf or on behalf of an entity. Some want to be actively involved in the startups they invest in (and will only invest in those instances where they feel they can add value), while others are simply looking to diversify their portfolios. Investors in our network routinely express a wide range of preferences regarding investment amounts, industries of interest and disinterest, company stage, valuation, geographic location, revenue generation, and various founding team characteristics.

Further, many of the classifications investors fall under are not binary and it is all too common for an investor to fall into multiple categories. One of the most challenging yet enjoyable parts of my job is learning as much as I can about every investor on SeedInvest. In fact, the importance of these personal relationships is one of the main reasons that we operate through a broker-dealer structure. It gives us the ability to forge real relationships with the investors in our network and allows them to get to know us as much as we get to know them.

I repeatedly see this individuality when speaking with investors who have either left or reduced their involvement in traditional angel groups, having grown tired of operating by consensus. Due to myriad individual investment preferences and biases, finding a deal which a large group of investors can universally agree to invest in is difficult, if not impossible. Simply put: there are no two investors who are going to look at an opportunity the exact same way. I can’t count the number of times a deal on our platform was considered horrible by some investors while others found it extremely relatable and an excellent opportunity.

Why Investors Pass

The uniqueness of each investor is borne out by what each investor chooses to invest in, and even more by the diverse reasons why an investor  chooses to not invest in a deal. The results of a recent SeedInvest survey illustrate this point wonderfully. Consider the fact that nearly 60% of accredited investors in our network have yet to find a deal that interests them. This is despite our working with hardware and software companies, consumer-focused and enterprise-focused companies, note offerings and priced rounds… everything from robotics, IoT, virtual reality, wearables, e-commerce, transportation, media entertainment, advertising tech, and consumer internet. In truth though, this doesn’t surprise me at all. There are a thousand reasons not to invest in any given deal and only a handful of good reasons to do so. Given the diversity of our 10,000+ strong accredited investor network, this makes perfect sense.

As an Investment Director at SeedInvest, you might think I’d be disappointed by all this. However, my job – and that of my fellow directors – isn’t to “sell” deals. Rather, we’re here to ensure that our investors are making informed investment decisions that they’re comfortable with. It is our job to listen to what our investors are looking for and source deals accordingly, not the other way around. I would rather see investors wait until they feel they have found the right deal which meets their individual preferences and criteria, rather than invest more frequently at the expense of long-term confidence.

The best investors diversify but take a stand

In order to be successful in this risky asset class, diversification is absolutely critical. For newer investors, investing through a syndicate can provide a degree of social validation (though it comes at a price). Funds certainly provide turnkey diversification (though some come at a price in the form of carried interest). A pure diversification strategy is clearly a smart way for an investor to build their startup portfolio. But just like public market investors hold ETFs as well as individual stocks, there’s nothing wrong with taking a stand on a particular startup that piques your interest for whatever reason.

Unlike other forms of investing, investing in startups can be highly personal. Where else can an investor’s capital have such a profound impact on a company? Where else can an investor’s personal and portfolio interests become so aligned? So long as investors are exercising a responsible startup investment strategy, it is not only acceptable but even beneficial for investors to feel empowered to go out on a limb every once in a while and invest in a company based on their unique investment preferences and where they feel they can add the most value.

The uniqueness of the early-stage market is only matched by that of the investors who choose to participate in it. It is their investment preferences and choices that add color to this vibrant marketplace. As SeedInvest continues to grow, we will strive to bring our investors a greater breadth of investment opportunities which match their diverse individual preferences.

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