When we were out raising money for our fund last year, one of the most common questions we were asked was this, “Would you feel comfortable leading deals out of the new fund?”
Our answer was, at the time, one-sided. We said certainly, there were many situations in which we’d want to lead, for reasons like building a stronger relationship with the founder or getting the inside scoop on future funding rounds.
You may agree with some of them, and in fact, they are good reasons to want to lead a deal. But they miss the crux of the issue. The question was not whether we wanted to lead, but whether we were qualified to do so.
“If your presence doesn’t make an impact, your absence won’t make a difference.”
- Trey Smith
The above quote says it all for me. Nowhere in there is room for why leaders would want to lead, other than to achieve results. You should want to lead because you know you can do so successfully — doing it for any other reason, will jeopardize the success of your portfolio company.
So what does it take to be an effective lead investor? I’ve been pondering this question myself, and have boiled it down to three key questions.
1. Can I help build an A+ founding team?
Even for repeat founders, hiring great people is a challenge. As a lead investor, you have to be very involved in that process both in terms of filling the pipeline with candidates and screening these candidates.
I have been very fortunate to find a partner, Eva Ho, who was a founding team member of two very successful tech companies and has hired more than 100 people over her 15+ year stint as an operator. The even better part is she is well-regarded as one of the “founding entrepreneurs” in Los Angeles and remains deeply plugged in with the community, which is a huge advantage in terms of sourcing great talent.
But say you’re not lucky enough to find a partner with that background — how then can you build your own hiring capabilities as a VC? I faced this initially as my experience was limited to running then selling a 10-person company and through that process I’d only ever interviewed 8 tech people. In addition, as a transplant to the LA ecosystem, I didn’t have the organic network that locals enjoyed. My solution was two-fold, and both followed this principle:
“When you become a leader, success is all about growing others.”
- Jack Welch
I used the growth of others as an incentive that lead them to me. Together with Arteen Arabshahi, who is the 3rd member of the Fika team, we launched an initiative called the “Fellows Program”. Every quarter we would host a dinner for 20–25 of the Director/VP-level employees at the top LA tech companies. Each quarter would be dedicated to a different functional group, like Engineering or Product. While the “Fellows” enjoyed the opportunity to grow by getting to know their peers and collectively addressing their challenges — the benefits through which we’d advertised the initiative — this was also a great way for us to get to know 100+ amazing people every year who could be potential hires for our portfolio companies.
My second method was to focus on the growth and development of people within my own companies. I wanted to get a better idea of what qualities I should be looking out for in candidates. Can you confidently articulate what to look for in a VP of Marketing at an early stage marketplace company? I couldn’t, and so I got to know those people from across my own portfolio. I scheduled monthly calls with VP-level employees in my later-stage companies, focusing on understanding the qualities that made them successful and how I could help them improve further. This has allowed me to have a keener eye when it comes to recognizing what makes people successful at specific functional roles.
2. Can I help them find customers?
“The first piece of leadership is really how you yourself build a network that allows you to add value collaboratively because you can connect.”
- Herminia Ibarra
Many early-stage companies face this challenge — they have a great idea, and the capabilities to deliver it, but not the credibility, the influence, or the social reach to find and engage potential consumers. A good lead investor needs to leverage their own network to help companies bridge that gap and connect them with that initial set of early adopters that will become their champions over time.
Given that 50% of our fund is focused on enterprise software companies, we made a conscious effort to get to know as many Fortune 1000 CIOs as possible. Any of these could be potential customers for our companies or even provide insights to how these companies could improve their product offering. The CIO summit we put on every year (3 years and counting), which attracts more than 80 CIOs and top enterprise software leaders like Aaron Levie from Box or Amr Awadallah from Cloudera, represents the culmination of our efforts and I am happy to say that more than two thirds of our enterprise software portfolio companies have picked up customers from the summit across the 3 years.
Now we are trying to build out similar capabilities for our other focus areas, namely fin tech, marketplace and digital health.
3. Can I connect them with the best follow-on investors?
Companies have a lifecycle just like any product — they start from the rawest form then morph into amazing products or services that can solve multiple needs. As lead investors at the seed stage, we have much in common with a manufacturing facility where our job is to make sure they’re in a fit state to be accepted by next people in the assembly line.
Our own specialization is in the $0–10M phase where we help companies get off the ground, establish a founding team and find initial product market fit. It is then our responsibility to help our companies find the best follow-on investors for the next stage. The follow-on investors we seek are those with a strong focus on building out the team, helping them down the path of acquiring more customers in an efficient manner and those who are able to connect the companies with the right channel partners to accelerate their growth.
How do we do this? We need to build a rapport with these later-stage funds and establish credibility, such that they will know we’re handing over a company in a strong, stable position ready for the next phase of its life. They need to know that you, as a lead investor at the seed stage, are knowledgeable, trustworthy, and competent, before they’ll even look at the company itself.
Make sure to start this relationship-building process early — these things don’t happen overnight. When I first started Karlin Ventures, we actually created a spreadsheet of top later-stage funds that we wanted to know and over the course of 3 years, our target was to go from knowing 40% of these funds to 80%. Every month we updated and consulted the tracker and stepped closer to our target. These days, we feel confident in our ability to connect companies with the best follow-on investors — the tracker is still going and sits around 95%.
It can be difficult for many of us, especially early in our VC lives, to “pass the baton” and let the next lead investor take over, but like with parenting, you have to let them take the next steps if you want them to keep growing. I have had the pleasure of working with several amazing follow-on lead investors for my companies and one example was when Revolution Ventures led the Series B investment in PolicyGenius.
Revolution as a firm has great experience supporting successful health/fin tech companies like Extend Health and Revolution Money but more importantly the lead partner, David Golden, who I work very closely with, has experience sitting on the boards of several successful late-stage companies and is able to warn PolicyGenius of the potential pitfalls that it might face. David and I now split a lot of the board responsibilities and my goal over time is that I will be able to roll off the board. In a strange way, that proves that I have done my job.
As a lead investor, you aren’t expected to know everything, but when you don’t, quickly surround yourself with experts who can help. You signed up to support the entire team in good times and bad and sometimes in sub-optimal outcomes, finding a home not just for the founders but the entire team is your responsibility. Finally, recognize that you are not there to direct founders, but your job is to walk with them and support them at every stage of the journey.