You’re a founder of a startup. You’ve built a crazy product and are now ready for some funding – time to schmooze the VCs, but which ones do you pick? Easy – the same things you look for when you look for someone to marry. Of course the relationship doesn’t last as long, but the long term nature means the same nurturing is important.
What do you want from that life partner? Being pretty and having money is great, but the relationship needs to go deeper for real success and the same is true of your VC investor.
Not all VC firms are created equal, especially on what they offer in addition to money and a pretty face. In his open letter to Dumb VCs, Andy Dunn provided a sort of checklist of issues startup founders should look out for. This initial list has been subject to both praise and rebuttals across the blogosphere – and by analysing this (very interesting) discussion I have come to the conclusion that a good VC investor combines the following five things:
1. Access to game-changing contacts and opportunities
The world is fast evolving, with more new business launches as the cost of set up falls, entrepreneurship spreads through the world and clone factories quickly exploit new opportunities, building a viable (tech) business with long term trajectory is getting harder than ever.
This means that the most important reason to choose a VC is the network they have and the ability to make the right connections for your business – and get you to scale quickly. This ability varies significantly across VCs, and you should give up more equity if you believe there is greater growth potential.
[Life partner analogy – someone who helps you grow spiritually]
2. Willingness to help (sleeves rolled up etc) when you need it, but standing back and letting you do your thing in the main
Andy asserts that “good VCs” stand back and let startups get on with their thing. I generally buy this, but the best VC funds realise when you need help and are available to give you the right level of support. The founder of any startup is not going to be all knowing, and the best VCs will provide coaching, guidance and hands on deck as and when required.
Mark Suster provides some prominent examples of help received by famous founders. Speaking to various startup founders in London I know generally like their VC investors and many provide a range of support that they have found useful:
- Roving interns that work across the portfolio to pick up slack
- A “sounding board” for product ideas
- Recruiting key team members
See FFVC’s TOPSCAN list and others who have built on this for more comprehensive thoughts on the kinds of help you can and should expect from your VC (including the network mentioned in point 1 above).
[Life partner analogy – someone who is laid back most of the time back has your back when times get tough]
3. Fast decision making, but knowing you and your product
One of the biggest problems that many entrepreneurs have with the investment process is how long it takes – days can quickly turn into weeks, weeks into months. This is a big deal – startup founders often have pressing cash flow needs and a longer decision making process means these issues only get worse.
Given the skew of startup returns (see halfway down the page), a longer due diligence process may be understandable, but as a startup founder make sure that you are not led down the garden path for too long and understand any reasons for delays.
On the other hand, you want a startup founder that understands you, your team and your product. Early on, your VC investor should know what you do and understand your product – I’m fully with Andy on this one.
[Life partner analogy – someone who doesn’t leave you hanging]
4. Treating you and your team with respect
Arrogance isn’t attractive. Don’t get me wrong, arrogance can lead to short term infatuation, but it is humility that results in love and marriage!
Your VC investor should respect you (not least because you will hopefully be making them a lot of money).
Your VC investor should be straight with you about what they can and can’t give you and about what they think of you. Transparency and trust is critical to a long and fruitful working relationship
Most of all, your VC investor should want to work with you no matter how active a relationship you choose to have with them.
[Life partner analogy – pretty obvious: trust, respect, honesty]
5. Track record of performance (to some extent)
Duh, of course you should work with VCs who have had successful exits right? Generally right, but with nuance.
As with any other industry, there are brand names out there in the VC space. You know the names, the so-called “2%” who have been there and done that and just the cachet of their name being associated with your company can open up doors (in terms of talent, exits and a whole host of other things).
However, it should be noted in general that bigger VC funds typically have weaker performance and the old adage from financial markets holds true: past performance is no guarantee of future performance.
Andy refers to successful exits and this is where I think it’s a bit murkier. The world is moving quickly (especially here in London) with new VC and angel funds popping up on a regular basis and, putting it simply, everyone needs to start somewhere. When picking a VC look at the track record of the fund but also pay careful attention to the track record of the individuals, and not only from an investment perspective but also what else they have done that could aid your cause.
[Life partner analogy –someone whose previous partners you admire… ok, it wears a little thin here but you get the picture!]
I’ve chosen to write about VC as I’ve met a few VC investors recently as well as guys who have just closed funding, and at the same time I read Andy Dunn’s post – it really got me thinking about what I’d want from any investor interested in my startup.
I’d love to hear your thoughts and I’m here to learn. If you’re a venture-backed startup founder, what did you look for before you took on the money? If you’re a VC guy, what else do you offer in addition to the above?