SSWISH — How to Win, Support, and Harvest Opportunities
Chip Hazard; General Partner, Flybridge
This post is Part 5 of a series on Chip’s Playbook of 4 Success Factors for Early-Stage Venture Investors. You can see Parts 1, 2, 3, and 4 here:
Part 1: Introducing the 4 Success Factors
Part 2: The Power-Law of Venture Returns
Part 3: Identifying and Capitalizing on Macro Market Trends
Part 4: The “SSWISH” Cycle
In the previous post, we discussed the See and Select portion of the SSWISH venture lifecycle. In this post, we’ll cover what happens once you’ve decided you want to invest in a particular company.
Once you’ve settled on backing a company, the first step is to convince the founder(s) they want to take your money, especially as the best opportunities are almost always going to be competitive, and oversubscribed, with more interest from venture investors than they are raising
I believe the first step to winning is simple: don’t be an a$$hole. If you follow this advice, you’re already ahead of at least half the investor field. To be clear, not being an a$$hole does not mean you always need to be a cheerleader. As Chris Sacca notes, the best founders “enjoy when their assertions or conclusions are shredded. The very best feel that yes is boring, and they thrive when wrestling with no.” How you go about shredding their assertions is what matters.
Every founder should be treated with the utmost respect — after all, they’re the ones putting their livelihood on the line. Respect means being responsive, prepared, and engaged, asking probing questions in a thoughtful, empathetic way, and, during the investment process, being clear on next steps and the steps to get to yes.
The second step to winning starts in the first meeting with a new potential investment and continues through the diligence process. No founder wants to feel like they have to educate potential investors on the basics. Another reason why having a point of view on markets and going deep in certain segments matters is that it allows you to start the discussion with a founder halfway down the field, ask better questions (which helps with selection), and leave the founder feeling like you can be a true thought partner with them in building the company. Related to this, speed matters. Just as no founder wants to educate potential investors on the basics, no founder wants the fundraising process to take longer than it needs to.
This requirement doesn’t mean you should adopt a single-meeting-yes approach‚ — if you say yes quickly, founders will assume you’re likely to lose interest just as quickly. Instead, find a way to engage that is focused on the most critical issues, provides time to build a two-way relationship with the founders, and demonstrates your understanding of the business, but does so in the span of days or weeks, not months.
An underappreciated aspect of winning is the diligence process, where you’re digging into issues and opportunities to understand a particular company and its founding team better. Every early-stage company cares first and foremost about its customers, employees, and partners. The best investors figure out how to make critical introductions during the diligence process whose input not only helps them conclude whether to invest, but also introduces the company to potential early customers, critical hires, advisors, and potential partners that can add value quickly. The flip side of this is what my partner Jeff Bussgang calls the rock-fetch diligence process (referred to in a slightly different context in this post), where the potential investor asks an endless series of largely irrelevant questions or goes through a simplistic checklist process that indicates they will potentially not be a great investor to be involved with in the long term.
Lastly, until we get to terms and valuation, be clear and articulate about the role you play post-investment and why this will add value to the founder(s).
Stand for something so that when the founders are thinking of forming a group of investors (aka a syndicate), they’ll say they want you involved for specific and concrete reasons.
If other companies in which you or your firm are investors support those reasons, don’t be shy about connecting the new potential founders with your existing portfolio companies as a reference. For every founder out there, investor diligence such as this is critically important.
On the subject of terms and valuation, I believe fair and straightforward is the winning approach. This doesn’t mean uncapped SAFE notes are the way to go (whereby the investor agrees to roll their investment into some subsequent round at whatever value that financing is done at) because it only defers the valuation discussion to some later date. Instead, be straightforward in explaining why you’ve chosen to present the terms you’ve selected. At Flybridge, for example, we prefer Series Seed term sheets and think founders should too, for many of the reasons articulated by Fred Wilson here. These tend to have very vanilla terms that are easy to explain and understand. Further, we tend to go open-book on valuation and walk through all the other companies we’ve invested in and on what valuations so new founders get a sense for our view of the market and how we evaluate their opportunity. They may disagree, and we may get outbid, but at least they feel like we weren’t arbitrary or trying to take advantage of them with unclear terms that may misalign incentives.
Every venture investor says they are value-added, but in my 25 years of experience, relatively few truly are. Those that are, not surprisingly, happen to be some of the best in the business. They develop a reputation for being helpful, which leads to more new opportunities. They can win their way into the best opportunities, and they actually move the needle for their portfolio companies in critical ways once they’re involved. We encourage our founders to look at every investor that is a shareholder and be able to articulate the value they expect to get out of that investor apart from capital. If they can’t provide a good answer, especially at the earliest stages when equity is dear, they shouldn’t be involved. As an investor, it’s critical to be clear and specific as to how you expect to add value.
How you support portfolio companies is specific to you, your skills, your firm (if you’re part of a fund), and whether you have a board seat or not. Some areas (by no means comprehensive) to think about in determining how best to support your portfolio companies are:
Access to customers
Recruiting support and introductions to potential employees
Coaching on strategic thinking
Sharing go-to-market best practices and insights
Holding teams accountable and ensuring a focus on the right issues
Market and competitive insights you see that the founders might not
Pushing teams to think about ways to invest more to go faster when warranted, or hold up a mirror when they should be reining in spending given uncertainties
Helping teams anticipate when there might be gaps and issues developing on their team
Opening doors with potential financing partners
Being the empathetic voice on the other end of the line when things are topsy-turvy
Whatever your pitch and approach, it should be authentic and consistent with your skills and experiences. It’s absolutely okay as an investor to say you don’t know the answer, or that a specific question is outside your areas of expertise. It’s also important to understand that there are times when the desire to help can be counter-productive (as a founder I know once said, “I am being helped to death”), so know when to pull back and let teams focus on driving the business forward.
Generating realized returns for investors is ultimately a VC’s job. However, when and how to do so is not always clear. This process is often outside of your control, as most exit decisions reside in the hands of the founders and executives of the portfolio company.
That said, there are ways to think about when and how to generate liquidity based on a few characteristics including the company’s potential, performance, need for and access to additional capital, and control of its destiny. Some examples may help illustrate this.
- For a company in a huge potential market that is executing well with a proven ability to raise capital at ever-increasing prices and a sound underlying business model, the answer is easy: go long. You have a potential outlier on your hands, and an early exit is a mistake.
- Sometimes, it might make sense as a seed/angel investor in such a company to sell a portion of your holding if the private market valuations seem high and you have a need or desire to recycle the capital into other new investments.
- For a company where the market has taken longer to coalesce, and capital is going to be scarce, have a conversation with the team about whether they would be better served to turn their talents to other opportunities or join another company with higher potential. These are not easy discussions, but as an early-stage investor, getting your money back on mistakes can help turn a good fund into a better one (although only salvaging mistakes will never make for a great fund).
- Companies in between these two ends of the spectrum are harder. Some businesses experience a golden moment when performance and potential are excellent, but the potential future risks are equally high. In this case, you can generate significant (but generally not outlier returns) early in the company’s life. This analysis requires weighing the risks and opportunities in consultation with the company’s founders about their goals and objectives. Similarly, some companies have high potential that is not married with excellent performance. In these cases, ask what drives the underperformance and how fixable it is relative to potentially looking for an exit?
- For more on this topic, I wrote A Founder’s Guide to M&A a few years back that contains some ideas relevant to this discussion.
In an environment where the average time to acquisition is more than 6 years and time to an IPO more like 8 years, one question I’m often asked is, “how do I know how I’m doing?” and “how do I hone and refine my approach for future SSWISHing?’. I cover some of the ways to answer this question in my post on “How Do You Know if You’re a Good Venture Investor?”.
Outside the SSWISH cycle, there are opportunities to make additional investments along the way. We dive into this topic in detail here in the final installment of this series on How to Succeed as a Portfolio Manager.
