By Hal Callais

Not All Startup Investors Are VCs

For those who do not know it, I am a venture capitalist. I have partnered with a group of investors to pool our capital together in a fund to invest in early-stage startups across the region to target outsized financial returns. In doing this, I will only be successful in this business if the founders that we partner with are successful. My livelihood rests on this success. While this is true for me, it is not the case with all venture capital groups.

To keep it simple, providers of startup capital can be defined as:

a) Venture Investors

b) Impact Investors

c) Venture Philanthropists

Knowledge is power

To be clear, I am excited to bring this up! The more groups engaged with the founders and startups within the ecosystem, the better it can become for everyone. When considering investor options, it is in every founder’s best interests to understand these differences. It may not seem like much, but the incentives and objectives of investors really matter when it comes to follow-on financings, capacity to support, and their (our) risks when we do a deal.

Lumped together as ‘investors,’ venture investors, impact investors, and venture philanthropists are all providers of capital. As a venture investor, I often work with impact investors, and (less frequently) venture philanthropists. Although, we are each a source of capital, our incentives separate us and how we interact with our partner startups over the course of an investment.

Incentives

At the heart of it, our incentives differentiate us. Venture investors are motivated by financial performance, venture philanthropists are motivated by mission, and impact investors are motivated by a blend of financial performance and mission.

Venture investors (like us), are compensated based on our investment outcomes. Therefore, we are incentivized by financial performance. Conversely, venture philanthropists exist to achieve a mission, so they tend to be incentivized by things which have no direct bearing on the outcomes of their investments. As a mix of the two, impact investors aim to achieve a mission through investment outcomes.

Summary

As a venture investor, if I don’t perform, I will not have the privilege of being a venture investor for very long. In contrast, the burden of financial performance for impact investors are less important, so long as they achieve their mission (think funds formed to make money by investing for social reasons). Venture philanthropists will exist so long as they are able to show positive scientific or social impacts that meet their mandates.

Here are some questions you can ask of the group you are speaking with, to understand these incentives:

1. Where does your investable capital come from? (a fund, a foundation, your own capital, etc.)
2. How did you get into the business of funding startups?
3. If you don’t meet performance expectations, will you be able to raise another fund?
4. What is your investment strategy? How flexible is your capital?
5. Can you provide follow-on financing?