Types of Investors
Equity investors can generally be divided into two categories: financial investors and strategic investors. Each has distinct objectives and considerations, which impact their approach to investment.
- Financial Investors: Financial investors prioritize alignment between the investment and their operational parameters. For example, funds may focus on specific types of companies, and their decision not to invest may not necessarily reflect the project’s quality but rather its structure, such as the company’s size, industry, or stage of development.
- Strategic Investors: For strategic investors, the potential value or synergies that a partnership could bring is crucial. The investment target may serve as a valuable distribution channel or a unique, exclusive service package, thus increasing the strategic investor’s competitive position. Strategic investors are typically interested in projects that fit closely with their long-term business objectives.
Key Considerations When Mapping Potential Investors
1. Stage of the Company
The stage of a company’s development can significantly influence its appeal to different types of investors.
- Commercialization and Scale: Investors consider whether the product or service is already commercialized and the current scale of operations.
- Investment Lifecycle: Many financial investors focus on a specific stage in a company’s lifecycle, such as seed, Series A, or Series B. This is often influenced by the fund’s size and its need to diversify the portfolio.
- Flexibility with Strategic Investors: Strategic investors may demonstrate greater flexibility if the company’s product aligns well with their strategic goals.
- Investor Expertise by Stage: The investor’s approach is often connected to the company’s current situation. Investors may seek situations where they can add value by contributing specific expertise. Different stages require unique insights and may involve areas such as:
- Technology development
- Commercialization of technology
- Growth acceleration
- Buy-and-build strategies
- Turnaround situations
2. Sector
The industry sector plays a critical role in investor interest, as many investors aim to achieve a competitive advantage by focusing on a particular sector or thematic area.
- Strategic Focus: Investors may choose a broad theme, like “climate investments,” which can encompass projects aimed at climate change mitigation. Alternatively, they may opt for more specific focuses, like “decarbonization through material sciences.”
- Resource Investment: Financial investors, even with a broad mandate, may narrow their focus to a particular vertical to make competitive decisions based on sector expertise. For example, within the energy industry, many sub-segments can be identified where the operating environment may differ significantly.
- Initial Fit Assessment: It’s often challenging to determine if a project fits within an investor’s strategy without first discussing it with them.
3. Geography
Geographical focus is another factor that shapes an investor’s interest and approach to investment.
- Geographic Scope: Investors typically define a geographical focus to mitigate risks associated with differences in business practices, culture, and logistics. Proximity or shared time zones can facilitate communication and collaboration.
- Broader Scope with Specific Focus: When investors have a more specialized focus in terms of sector, life cycle, or other criteria, their geographic flexibility may be greater to ensure they find opportunities that fit their specific investment profile.
4. Additional Factors Driving Investor Interest
A range of other considerations can also play a role in investor interest, including:
- Team: Investors look for experience, competence, and motivation within the management team.
- Patents & Intellectual Property: IP can serve as a competitive advantage, particularly in technology-driven sectors.
- Ownership Structure: The company’s ownership structure impacts its capitalization potential and the operational team’s motivation.
- Investor Consortium: The potential composition of the board and future financing profile can also influence interest.
Conclusion
Mapping a sufficiently wide universe of potential equity investors is essential for a successful fundraising. By including a range of investors, companies can ensure flexibility and maximize opportunities for valuable partnerships. Working with an advisor can be especially beneficial in this process. Advisors bring industry knowledge, experience, and connections that help companies navigate the investment landscape efficiently, facilitating introductions, and ensuring that the right investors are identified and engaged.
Author of the blog:
Miikka Lievonen
Director, Grannenfelt Finance
miikka.lievonen@grannenfeltfinance.fi
+358 50 554 5844
LinkedIn-profile
The writer has 10 years of experience working in corporate finance and capital raising related projects. He has advised multiple growth companies in fundraising including Vastuu Group, Beely, P2X Solutions, and Varjo.
