What Makes a Founder-Friendly Investor?
One founder’s perspective
Venture capital is abundant. Despite market forces driving valuations lower, money remains a commodity. VCs compete with one-another for the opportunity to invest in the best companies. Investors, therefore, strive to set themselves apart by building a “founder-friendly” reputation. So what makes an investor founder-friendly?
Having recently raised Series A financing for AirMap, I thought I would share some experiences of interactions with existing and prospective investors. By way of background, I bootstrapped my first company, founded in 2006, and exited in 2014. I raised seed financing for AirMap in June 2015 and had my first VC director join the board (Bilal Zuberi of Lux Capital, who is awesome). We then closed Series A in March 2016 and now have a second VC director on the board (Hemant Taneja of General Catalyst, who is also great). I’ve also made several angel investments in early-stage companies, so I have a little taste of being on the other side of the table as well.
Firstly, the VC-founder relationship goes through a few phases. When a founder is going through the courting and fund-raising process with an investor, it’s the investor’s job to make the best possible decisions for them and their fund. After they’ve invested, they are much more closely aligned with the founder’s interests. This is a bit of an awkward transition. The investors I’ve been most inclined to let in are the ones who I felt genuinely showed their true colors through the courting and negotiating process. I like when investors acknowledge that their interests are a bit different at this phase than they will be post-investment. Without acknowledgement, you’re operating in a more uncertain environment that can be uncomfortable. Post-investment, the investor still has to make decisions that are in the best interest of the fund, but generally speaking a bias toward what’s best for the company turns out to also be what’s best for the fund.
Founders: Do you want your spouse to leave you alone?
Founders and investors get married when an investment is made. Would you want your spouse to leave you alone? Only when you’re about to get divorced. Bad relationship. Great investors know what sort of interactions their founders like, they know when to spend time together, they know when to give space, but they certainly don’t leave their companies alone. When I’m about to make a big mistake, I want my investors to tell me to think twice. Moreover, investors (especially lead investors) should be an extension of the team. Our investors have proven helpful in business development, recruiting, fundraising, and in many other ways. Early on, some advisors recommended that we raise a convertible note instead of equity for our seed financing, and that we not form a board until Series A. I’m glad that we chose to do a priced seed round and to form a board with Bilal at that time. His focus and attention on AirMap have proven invaluable.
Founder-friendly investors share their experiences with entrepreneurs. I respond best to advice when it comes in the form of a shared experience, and I think most entrepreneurs and executives would agree. We are generally evidence-based decision makers, so if you’re an investor and you find yourself saying “I think you should…” maybe stop and ask yourself “why?” Have you had previous portfolio companies that have pursued that strategy and it worked? Please share specific examples of how successful or unsuccessful specific measures have been in the past. Of course, there is always an exception. Many of the most successful startups are doing something entirely new, so many decisions could be based on intuition. In these cases, I think that an investor’s advice will be most useful when qualified clearly that it is based on intuition and shouldn’t be relied upon as much as actual experience.
Running a company is quite similar to flying an airliner. As CEO, I’m the captain, but I have a whole crew of people with great minds and senses who can help inform my decisions. An airline captain not only relies upon his or her copilot, but also the flight attendants, airline dispatchers, mechanics, air traffic controllers, and other resources to help make the best decisions that ultimately result in a safe flight. Sometimes, airline captains with decades of experience benefit from a bit of coaching from training captains, line check airmen, or even the airline’s chief pilot. Investors and board members are a part of that crew for the CEO. The best investors and board members are great coaches. As CEO, I will make the important decisions and I am ultimately responsible for the success of the company, but I need to listen carefully and learn from those around me.
There is rarely a place for ego in business decisions. We all have a lot to learn. It’s easy for an entrepreneur to trust his or her instincts and to place little value on outside opinions, but such an ego-driven bias has derailed many businesses. Of course, if you’re right, don’t let others’ feelings get in the way.
Help with fundraising (and networking, generally)
The best investors help their portfolio companies with fund-raising. Investors are in the fund-raising business. Founders are not. Founder-friendly investors use their strongest skills to help their portfolio companies the most — help them raise money. Investors also know lots of other investors, so it’s much easier for an investor to make introductions and have preliminary phone calls or meetings to help determine who might be a good investor for the company. Of course, it’s great if investors invest pro-rata or super pro-rata in follow-on financings.
Investors are in the business of meeting people, and in that process they build up tremendous networks. In addition, when investors belong to a fund, other partners’ networks also come into play. Therefore, investors can make terrific introductions to potential hires, advisors, board members, business partners, and potential acquirers.
Please respect my time
Believe it or not, dealing with investors is not the only thing founders do. I know that an investor’s time is scarce, too, but I’m running a company here. I have to work with my team to determine our strategy, recruit the best people, create incredible products and services, build relationships with partners and customers, and (once in a while) talk to investors.
During the courting and fundraising process, a founder-friendly investor considers carefully before asking for more of the founder’s time. If an investor is unlikely to make an investment, she doesn’t take meetings. She doesn’t send a junior associate out on a diligence hunt if the results won’t make a difference in her decision. She doesn’t waste the founder’s time knowing that she’s unlikely to invest, but wanting to use the opportunity to learn as much as possible about the industry. I know it happens all the time, but it’s incredibly rude.
A founder-friendly investor doesn’t play games. There is no “signal” in what the entrepreneur is telling you. Entrepreneurs play it straight. Trust me until I prove that I can’t be trusted, and then stop talking with me. Playing the high school “I think he likes me” game just wastes everyone’s time.
There’s a lot at stake
Let’s all acknowledge that there is a lot at stake for everyone. The investor is investing hundreds of thousands or millions of dollars, which is a lot of money. The founder is building a company, dedicating many years of his or her life to the endeavor, creating products and services that (hopefully) millions or billions of people will depend on. The company is employing people — perhaps thousands of people one day. Let’s not make this a game. Founder-friendly investors aren’t playing poker with companies — they care about the people working at the company, they care about the customers, and they care about how their endeavors will positively impact lives.
Perhaps the best short-term measure of whether or not an investor is “founder-friendly” is if entrepreneurs refer the best ideas and people they come across to the investor. The best long-term measure is whether or not the entrepreneur returns to the investor for subsequent startups.