Forward Partners’ More than Money report published earlier this month made uncomfortable reading for the U.K. VC community. While 92 percent of investors claim to add value, 65 percent of founders disagreed and gave their investors a low value-add rating, saying they “tried, but failed” to add value beyond capital.
In short, there is a significant mismatch between the glossy marketing materials that VC funds put out claiming how much they support their companies and the reality post-investment. And unlike other industries, where you can switch out poor-performing service providers with relative ease, in venture this is not an option.
For founders on the fundraising journey, taking the time to carefully evaluate the offering of each investor is essential to avoid been trapped in a sub-optimal relationship. Here are the five key steps that founders should consider.
Figure out what you want from your investor
Broadly speaking, most founders want the same – helpful, supportive, empathetic investors. Creating a bullet point list – effectively a ‘job spec’ for your VC – is a useful way to align expectations. This might include support with hiring, operations, financial planning, sales, PR, fundraising, strategy, access to offices, and more. If you need specialist support in your sector this is a good time to identify the scope of that.
It is also sensible to set expectations on communication channels. Are we going to chat as needed on WhatsApp or is this a once a month via the board kind of deal? And who at the firm do we have access to so we can ‘pick their brains’? Every founder is different and so this is about ensuring that expectations are correctly aligned from the outset.
Curate the right mix of investors on the cap table
A single investor can rarely deliver everything. At the early stages of investment, a healthy cap table will typically include one or several funds as well as a handful of angel investors. Each 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 post-investment and look for evidence that they will be able to deliver on this promise.
Appreciate that you cannot always get what you want
The perfectly optimized cap table with several leading funds and heavyweight industry angels is, of course, not always possible. Sometimes it is preferable simply to get cash in the door so that the founders can focus on building the company. In this case, the focus should be on securing investors who will not negatively impact the company.
Founders should be aware of investors who exhibit interfering and micromanaging-type behaviors as well as those who have a poor reputation in the market. The former will make it harder to execute on the business and the latter may send a negative signal to investors evaluating the company in a later funding round.
References should be extensive and of your choosing
Once you have formed a view on the likely composition of your round, you must take references to validate your decision. You should speak to as many founders as possible who have worked with the investor, trying to cover both upside and downside scenarios as well as investments they made recently and longer ago.
It may be helpful to think of these in the same way you would hiring a co-founder – that is the level of importance you should ascribe to them and the level of detail you should go into. Prepare a list of questions ahead of the call so that you have a structured approach that goes further than trading general impressions.
Landscape VC is also a useful resource for founders looking to obtain an independent view of VCs sourced from the crowd and is a valuable additional data point.
Take the time to build a proper relationship
In 2021 taking your time is considered rather old-fashioned, but rushing into relationships, especially those of the founder-VC kind, does not tend to deliver the best outcomes. Spending time with your future investor ahead of closing your investment will help put in place solid foundations and the basis for a strong working relationship for the years ahead.
The speed of deal-making in 2021 means that less time is being given to relationship building and ensuring that there is a good fit between founders and investors.
This is a mistake. Founders should be using the hot market to their advantage to secure funding, but gently pressing the brakes as they need to later in the process to ensure they do not get hit with a case of buyer’s remorse after closing.
A strong founder-VC relationship can be a real asset to the founders of a company, whereas a weak one can act as a significant distraction, or worse, a drag on growth.
Thorough research is key to give the best chance of securing the optimal relationship and benefiting from the value add that the VC talked about when you first met.