Knowing Your Strengths, Know Your Weaknesses

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By Linda Doell

It's time to look in the mirror.

Investors are familiar with the ritual of examining every piece of a startup from the character of the co-founders to the smallest expenditure. The process reveals the opportunities strengths and weaknesses and informs the investors decisions and course of action.

But few investors can turn the process around and evaluate themselves as rigorously. It's too bad. Doing so will reveal strengths and weaknesses of the investor himself and inform every decision he makes and every course of action he takes.

Determining an investors strengths and weaknesses starts with this question: "What's your appetite for risk?"

Investing in startup companies is a risky business and the road to profitability and success is littered with the remains of startup companies that didn't make it. The reality is most startups won't make it. As an investor you have to come to grips with that risk.

Once an investor has assessed their own risk tolerance, they can safely proceed to create an investment plan, wrote Adam Bold of U.S. News & World Report. "Risk tolerance is hard to determine and different for each person. No one likes to lose money. But most people understand they will have to accept some risk in exchange for having their investments go up over time."

After measuring one's appetite for risk, it's time for an investor to consider what motivates them to invest in the first place. Some investors look to numbers while others look to the innovation of the proposed product. The trick is to understand the pitfalls that accompanies the motivation.

There are four basic types of investors, each with their own strengths and weaknesses, said Cameron Chell, co-founder and CEO of Podium Ventures:

The ROI (Return on Investment) Investor is all about the numbers and the bottom line. What this type of investor needs to keep in mind is the startup team. Don't get so caught up in the numbers that you miss the team's potential.
The Passion Investor loves innovation and what attracted this investor in the first place was the potential disruptive technology. Since this investor feels connected to the startup and its innovations, this type of investor might hang onto the investment longer -- which if the numbers don't back that up could mean a loss on the investment. This type of investor would have gotten caught in the Internet bubble bursting of a decade ago.
The Support Investor backs the personalities and potential of the team. This type also runs the risk of holding on to an investment too long instead of withdrawing in an appropriately timed exit.
The Contribution Investor focuses on the final outcome and the contribution to the community around the startup. It could take other investors to make these type of investments profitable because they are generally regarded as weaker financial investments.

Once an investor determines which type of investor they are, they can insulate and compensate for their weaknesses and build on their strengths.

Avner Mandelman, a reporter for Toronto's Globe and Mail recommended investors find an investment partner to balance each others' strengths and weaknesses.

"Good investors are often more thinkers than feelers," Mandelman wrote. "... Indeed, the thinking types often end up taking the money of the feeling types at market turning points. So if you are a strong feeler, team up with a cold-blooded partner who can keep you from getting too emotional."

Do you recognize the investor in your mirror and how to work the investment to your advantage?