Does it matter who invests in the seed stage of a startup?

As with many aspects about business and entrepreneurship, there is no clear ‘yes’ or ‘no’ answer to this question.

It depends on a number of factors. Ideally at the seed stage entrepreneurs should seek investors who will help them in the formative stages of the venture. Individuals who can provide an experienced perspective, or who can provide an experienced opinion to help make choices, or who can make introductions to potential customers, etc. are ideal investors in a startup stage.

Also, because in the seed-stage the venture is likely to be still ‘experimenting’ with a number of aspects of the business – pricing, product features, operational aspects, marketing & sales programs, etc. – it is important to ensure that the seed stage investor understands that some of these experiments will work, and some won’t. I.e. you want your investor to be supportive of your experiments, and comfortable with some of them not working out.

At seed stage you need investors who are empathetic about your aspirations and wishes, and who are supportive of the direction you are taking. You need investors who will allow you to chart the course of your venture’s journey, even if they provide an experienced perspective. On the other hand investors who are determined to influence your decision making to ensure that their investment is safe are likely to be a challenge to manage.

Strategic investors (i.e. individuals or companies whose business can benefit from your venture’s success. e.g. a pharma company can be a strategic investor for a startup that is building a community of doctors) can be a good option, but can also be a double edged sword. For strategic investors often the decision to provide financial support to a venture is the value they will derive from the venture’s success (as explained in the example above). However, if the venture decides the pivot, or alter the model, the strategic investor may quickly lose interest. Also, sometimes a strategic investor, who is also a potential customer, can make it difficult for the venture to get other customers who the strategic investor may be competing with).

However, often entrepreneurs are unlikely to be in a position to be picky and choosey about who the investors will be. Any case, even if the entrepreneur does not have a choice, and his her/his back to the wall and needs the money desperately, I urge entrepreneurs to not take money from someone who you are not comfortable with.

Author: Prajakt Raut

Prajakt Raut is the founder of Applyifi.com, and author of the book for startups - ‘Starting Up & Fund Raising’ Prajakt personal goal in life is to encourage and assist a 100,000 people to become entrepreneurs. _____________ Prajakt is the founder of Applyifi - an online platform that provides startups a 36-point scorecard and assessment report on the venture's investment readiness [www.applyifi.com], and helps them improve their odds of getting funded. Prajakt is also the founding partner of The Growth Labs, a platform where growth-stage companies get sharp, incisive advice from senior professionals and experienced entrepreneurs. [www.thegrowthlabs.in] Before starting Applyifi, Prajakt was the head of operations at IAN, founding member of a leading incubator, and the Asia-Director for TiE (2004 - 2007). Previously Prajakt had co-founded Orange Cross, a healthcare services company, and was part of the founding team member of Idealake Technologies. While in college Prajakt had founded a printing business and has spent over 10 years working in leading advertising agencies. Prajakt’s book, ‘Starting Up & Fund Raising’, helps startups understand an investor’s perspective, and helps them improve their odds of getting funded. The book also helps entrepreneurs understand the building blocks of a business. View all posts by Prajakt Raut