What you should expect from your VC investors.

Your relationship with your investors is one of the more important in your startup’s life, but often poorly understood by even experienced founders. It took me multiple startups, and both success and failure, to grasp the differing incentives and where the line between marketing rhetoric and sincere belief lies. Here are some of the lessons learned.

This is a big topic, with nuances specific to different sectors and stages of investment, so this will be by necessity an overview, perhaps with a bias towards early stage investments because that’s what we know best. Also, while there’s a little crossover, angel investors are a different matter, with different skill sets, incentives, and drivers. Some of this list applies, but much does not.

Honesty.

The number one thing you should expect is honesty. Like any working relationship, if there’s going to be trust, an investor must be upfront with you about their situation, their priorities, their capabilities, and everything else. Investors can be reluctant to share things that highlight the differences between your incentives and theirs, or that might make board meetings more tense than they already are, but the reality is that a little short term discomfort always, always works out better than suddenly finding out your mental model of them is wrong.

Relationships.

One of the ways they should be helpful is by extending your relationships. Experienced investors have cultivated a wealth of initial customers, potential acquirers, additional investors, advisors, and especially new hires that they are actively looking to apply to each of their investments. These relationships are commonly perceived as a large part of the value that distinguishes a good investor from the dreaded “dumb money,” and so most investors will feel good about you asking if they know people who can help.

Advice.

Of course, they’ll also feel good about you asking them for advice. Investors won’t often know more than you about your product or customers, even if they’re experienced in your sector, but they’ve probably seen a lot more commercial governance, financings, and M&A activity than you have, and while this stuff is rarely the difference between success and failure, it is often the difference between a $100m exit and a $150m exit.

Coaching.

More than advice though, a good investor can be a coach. Even when they aren’t as good at executing as you might be, the perspective of a smart person who has context and understands what you’re trying to do can be invaluable in helping you improve your performance. Roger Federer, the (second?) best tennis player in history, has been coached for the last five years by Ivan Ljubičić, who might generously be called the 500th best player. Similar situations are common across most sports, but still a rarity in the startup world.

Their expertise is a double-edged sword though, in two ways. Firstly, this financial engineering expertise is often leveraged against you as well. It’s not uncommon for investors to use complexity to tilt deal terms in their favour, or even to use less scrupulous tactics like extending negotiations until a startup runs out of other options before renegotiating the deal.

Different Priorities.

This happens because the interests of founders and investors are only superficially aligned. An investor with a portfolio of investments has a risk profile quite different from a founder’s. A small exit that represents a life-changing win for a founder is often irrelevant to the investor who is looking for the one or two big exits that they need to return their fund, and so it’s rational for an an investor to prefer a small chance for a big exit (with the often attendant large chance of no exit at all) over a big chance for a small exit. You should expect investors to have different priorities than you, and to enforce those priorities. To misappropriate a saying, you’re not their customer, the limited partners who provide their capital are; you’re the product. You can mitigate this somewhat by making extra effort to align your interests, such as by ensuring they have the same class of stock you do, but you can never eliminate it entirely.

This extends to follow-on funding too. No investor is going to give you more money just because your startup is going well, or is going badly, or for any other reason than they think they will get a better return on their investment than putting their money elsewhere.

None of this is a bad thing, of course. They’re just doing their job, providing a return for their limited partners. You’re just doing your job, making your startup successful. Each of you is an important part of the other’s journey, but just a part. Set your expectations appropriately and everyone is more likely to come away happy.

Execution Advice That Isn’t Always Helpful.

Few investors have been founders, and their execution advice isn’t always helpful. Vinod Khosla, Sun Microsystems co-founder and later an investor via Khosla Ventures, famously said that “70–80 percent [of investors] add negative value to a startup in their advising.” It’s difficult to extrapolate from patterns observed at board level to tactics that are useful day to day, and you should expect to treat execution advice from investors with a grain of salt.

By now you’ll have seen there’s a common theme here — you should expect your VC investors to be similar to your other working relationships, from employees to customers: comprised of people with a related but slightly different goal, more effective the closer you can align their needs with yours, and more likely to be successful when you understand the others’ needs and incentives.

There’s one more thing that bears saying — it’s a two-way street. If you aren’t honest with your investors, you should expect them not to trust you. If you don’t extend your relationships to help them, you should expect them to withhold theirs. If you don’t acknowledge the differences between your respective expertise and incentives, you should expect this to lead to clashes.

Hope this helps you navigate your investor relationships, and as always, reach out if you want to talk startups!