Greed or Fear: What Really Motivates Investors

This article was written by Asheesh Advani of Entrepreneur.com. Asheesh is Entrepreneur.com's"Start-up Financing" columnist and president of CircleLending, a financial services company that facilitates loans among friends, relatives and business associates.

Over the course of building my business, I've raised money from many different types of investors: venture capital firms, small investment firms, wealthy angel investors, angel groups, private lenders, and relatives and friends. I've seen first-hand how greed and fear sometimes motivate investors to behave in irrational ways.

Learning more about these motivations can not only help you raise money, but also help you better manage your investors and understand the human side of financing a start-up.

For this column, I'm going to focus on two significant financial resources: venture capital firms and angel investors. When I was younger, I was told venture capital firms invest out of fear (losing the deal to another firm) and angels invest out of greed (making more money than their friends). I've come to learn this is a gross oversimplification.

A venture capital firm consists of individuals who make investment decisions with their own interests and their firm's interests at stake. Reputation matters a lot -- the reputation of the firm among its peers, the reputation of the partner or VP who is proposing the investment to colleagues, and the reputation of the firm among limited partners such as university endowments and private funds that capitalize the venture capital firm.

As the theory goes, it's reputation that makes venture capital firms fear losing a deal -- that is, an opportunity to invest in your company -- to another firm that's also competing for recognition in the industry. While there's some truth to this, I've found venture capital firms are driven by gut instinct, cold hard business fundamentals and fear -- in equal doses.

So what does that mean for you? Gut instinct -- when you're on the "wrong" side of it -- is irrational and unpredictable behavior. VC partners often will pass on a deal because it "doesn't feel right," even if they think the business opportunity is sound and they might lose the deal to another firm.