A recent report shows that the majority of founders have negative experiences with value creation … [+]
Forward Partners’ report “More Than Money”, published earlier this month, was uncomfortable read for the UK VC community. While 92 percent of investors claim to create added value, 65 percent of founders disagreed and gave their investors a low value added rating. They said they “tried but failed” to add value beyond capital.
In short, there is a significant mismatch between the glossy marketing materials issued by VC funds and the post-investment reality. And unlike other industries where you can swap out poorly performing service providers with relative ease, this is not an option with Venture.
It is important for founders on the fundraising journey to take the time to carefully evaluate each investor’s offering to avoid getting trapped in a sub-optimal relationship. Here are the top five steps for founders to consider.
Find out what to expect from your investor
By and large, most founders want the same thing – helpful, supportive, empathetic investors. Making a bulleted list – practically a job specification for your VC – is a useful way to balance expectations. This can include hiring, operations, financial planning, sales, PR, fundraising assistance, strategy, office access, and more. If you need specific assistance in your industry, this is a good time to begin researching the scope of that industry.
It also makes sense to set expectations for communication channels. Will we chat on WhatsApp as needed or is this once a month via the board? And who in the company do we have access to so that we can rack our brains? Every founder is different and it’s about making sure expectations are right from the start.
Curate the right mix of investors on the cap table
A single investor can rarely deliver everything. When you start investing, a healthy cap table usually includes one or more funds as well as a handful of angel investors. Every investor should earn their place on the cap table by offering advice, insights, or connections that will help grow the business.
Founders should ask each investor how they intend to support the company after investing and look for evidence that they can deliver on that promise.
Appreciate that you can’t always get what you want
The perfectly optimized cap table with several leading funds and angels from the heavyweight industry is of course not always possible. Sometimes it is preferable to just get cash in the door so the founders can focus on building the business. In this case, the focus should be on securing investors who do not negatively affect the company.
Founders should be aware of investors who exhibit disruptive and micromanaging behaviors, as well as those who have a bad reputation in the market. The former makes it difficult to do business, and the latter can send a negative signal to investors who will evaluate the company in a later round of financing.
References should be extensive and of your choice
Once you have an idea of the likely make-up of your round, you’ll need to use references to confirm your decision. You should speak to as many founders as possible who have worked with the investor and try to cover both up and down scenarios as well as investments they made recently and a long time ago.
It can be helpful to look at these the way you would hire a co-founder – that is the level of importance you should attribute to them and the level of detail you should go into. Before you call, prepare a list of questions so you have a structured approach that goes beyond trading general impressions.
Landscape VC is also a useful resource for founders who want an independent view of VCs coming out of the crowd and a valuable additional data point.
Take the time to build a proper relationship
In 2021, taking your time is considered pretty old-fashioned, but falling into relationships, especially those of the founder-VC kind, won’t produce the best results. By spending time with your prospective investor before finalizing your investment, you can lay solid foundations and lay the foundation for strong working relationships for years to come.
The speed of business deals in 2021 means less time is spent building relationships and ensuring a good match between founders and investors.
This is a mistake. Founders should take advantage of the hot market to secure funding, but gently apply the brakes to ensure they are not hit by repentance from the buyer once they close.
A strong Founder-VC relationship can be a real asset to the founders of a business, while a weak relationship can be significantly distracting or worse, draining growth.
Thorough research is key to giving the best chance to secure the optimal relationship and reap the added value that the VC talked about at your first meeting.