Andrew Sherman, in his very useful book Raising Capital (3rd Edition, 2012) classifies equity investors into three types: Emotional, Strategic, and Financial. The classification is based on his extensive experience in fund raising. Other classifications are possible but today we will discuss Andrew's three-fold classification.

The emotional investor captures the idea that some early investors in a company may do so because of they have personal relationship with the company owner. Friends and family are often promoted as a source of early financing. Some investors may only invest in companies in which they have a personal relationship with the owners.

The strategic investor is one who sees strategic value in putting money into a particular company. They may, for example, have experience in the industry and partnering with a startup in a similar industry might be a good way to grow their business. They may also want access to the research and development the company has done or the talent they have assembled. Their financials may be important, but they are more interested in the non-financial aspects of the deal - what synergies a deal might bring.

The financial investor is interested in the bottom line and ensuring that the numbers add up and it is a financially worthwhile project to invest in. They invest in the rewards that a well executed business plan will produce.

I have three questions about how we might interpret this distinction:

1. Should we view investors as only fitting into one category for all their investment decision making?
2. How likely is it that an investor will flip from being a financial investor in one deal to being a strategic investor in another deal?
3. Can these investor types instead be viewed as orientations with investors giving more or less weight to the different factors (emotional, strategic, financial) depending on the deal?

Irrespective of whether investors are always, sometimes, or more or less emotional, strategic, or financially oriented, it is important that the entrepreneur raising funds recognize what type of investor they are appealing to or dealing with. In general, we might expect online investors to be less emotionally oriented when screening investment pitches and more likely to be strategic or financial in their orientation. Investment pitches are often geared towards the financial investor because it is generally a good assumption that the business plan and numbers should be good in order to attract investors. A strategic investment pitch while promoting a good return on investment, might also spend some time on what might make the company look good to a potential strategic partner who is more interested in the non-financial aspects of the company (e.g., clients, intellectual property, talent).

So if you are looking for an equity investor it might be useful to distinguish between whether you are seeking a strategic or financial investor and to make sure you highlight details that might be relevant to that type of investor in your pitch. Also, when you are dealing with them, again recognize the type of investor you are dealing with.

Equity financing is one type of financing along with debt-based financing. According to Andrew, the optimal capital formation strategy of a company generally consists of some balance of equity and debt-based financing.