In the vast realm of venture capital, much has been expounded on the qualities of lead investors that founders should actively seek. These influential figures, who exchange capital for significant stakes and potentially board influence, should offer strategic alignment, vital expertise, and valuable industry connections. However, let’s shift the focus momentarily to the often-overlooked minority investors—the key players that fill out a round or the cap table before a startup is ready for a full-blown fundraise. Whether they are friends, family, angels, or venture capitalists, these unsung heroes can be categorized into four distinguishable archetypes. As founders, it is crucial to weigh the risks and rewards that come with each archetype when shaping your cap table.
1. The Ghosters: Silent Benefactors
In the realm of minority investors, we encounter the enigmatic figures known as “The Ghosts.” These investors make their presence felt by writing a check, only to vanish into the shadows. Their motivations may range from being investment novices seeking market education to biding their time for more active involvement, or perhaps they simply lack the bandwidth at the moment. Nevertheless, we welcome these spectators onto a cap table. While they may not bring immediate value beyond their financial contribution, they also do not consume the precious time of the founder. As long as the investor’s long-term ambitions align with the startups’ and they meet the minimum check size, these silent benefactors tend to leave a net positive impact.
2. The Promisers: Beware of Smoke and Mirrors
Ah, “The Promisers.” Every founder has encountered this archetype—an investor who talks a big game but falls short on delivering tangible results. Their modus operandi revolves around empty promises of coveted connections, introductions to influential networks, and grand future plans. However, they rarely live up to their lofty claims. Instead, they may burden founders with irrelevant queries, incessant demands for face time, and last-minute requests for favors granted to larger investors. Beware of these illusionists and their mesmerizing allure. Relying on their promises can lead to headaches and wasted resources.
3. The Drivers: Operational Partners Extraordinaire
Enter “The Drivers.” These investors go beyond their financial contribution, becoming integral parts of our entrepreneurial journey. They immerse themselves in the trenches, fighting alongside the team. Drivers possess the unique ability to propel top-line growth, bolster balance sheets, and fill critical gaps within organizations. The level of interaction with these investors won’t rival that of lead investors, but the rewards are still substantial when the right partnership is in place. Founders must exercise discernment early on when a minority investor has this reputation as time is a finite resource. Be selective and ensure alignment with your lead investor—leads are strategic partners, while Drivers should be operational partners.
4. The Mavericks: Extraordinary Rarities of Fortune
Have you ever caught a glimpse of the Northern Lights or the Trevi Fountain without spectators? Few have. And in the entrepreneurial world, the equivalent of happening on this level of rare event is finding a Maverick. It’s not that these elusive investors don’t exist; rather, encountering them requires the perfect confluence of circumstances and timing. These exceptional people reveal their true form when we least expect it. Picture this: during a quarterly update, a request for a COO emerges, and a silent investor, who had remained dormant for a year, swiftly introduces leadership to a seasoned operator with an impressive exit under their belt. Alternatively, when the market turns, and the startup urgently requires a bridge loan to meet payroll, this investor steps forward without hesitation, offering favorable terms. Don’t expect all investors to possess these maverick-like qualities. Instead, be astounded when they reveal their extraordinary powers.
Now, the million-dollar question: How do we discern an investor’s archetype? There are two tried-and-true strategies: conducting reference checks and requiring investors to demonstrate their value before accepting their investment. These approaches help founders evaluate an investor’s track record, reputation, and potential contributions. Unlike lead investors, who are limited in number, founders may have numerous minority investors. This amplifies both the risks and rewards associated with these investors. Therefore, it is crucial to invest extra time upfront to ensure that investors with smaller stakes can potentially bring the exponential rewards to the company rather than growing into the exponential risks.