Framework Of Trust Between Founder & VC

As a VC, I work hard to earn the trust of my entrepreneurs. The moment I wire the money, in my mind, our interests are aligned — we both want them and their company to be wildly successful. Because being a founder is one of the most stressful jobs there is, I not only find myself helping with strategy, but often playing the role of business (and sometimes personal) therapist. I welcome the good, the bad and the ugly and find the trust that is built while working so closely with my founders to be one of the most rewarding parts of the job. However, not all entrepreneurs are comfortable trusting their VC and when I cannot break through, it befuddles me. Why not let me in to help?

I recently got my answer when I attended a workshop where a top-tier CEO coach explained the formula of trust and where founders and VCs can get tripped up.

The formula of trust has three parts: sincerity, reliability and competence. While not all founders find their investors to be competent and reliable, the majority do. Investors’ pattern recognition through seeing so many businesses, network, and connections give them a leg up on competence. And most good investors are generally reliable in that when they are called or emailed, they respond — they are there for their founder. The hardest one is sincerity, since founders will typically assume that the investor needs to care for the company first and foremost. Particularly with less experienced or less confident founders, this assumption can lead founders to look at the investors as more of a judge than a partner. It is challenging for a founder to be fully open with an investor when the founder sees the investor as someone who is evaluating the founder’s performance and may potentially replace the founder one day. The best founders are more focused on the value of their equity than on any ego associated with them being perfect at execution, and are constantly looking for constructive criticism (which in turn, makes them better at execution).

So, how does an investor earn the trust of their entrepreneurs? Or, what due diligence can an entrepreneur do ahead of time to know if their investor is trustworthy?

I recommend discussing the terms of the relationship at the beginning as well as doing your homework on the VCs you are considering working with…

• My partner, Josh, always tells his founders that he will never, ever, talk behind their back and wherever he goes, he will have their back. He makes that promise at the beginning of the relationship, and lets them know that if he has something to say, he will share it directly with them. He also warns co-investors, “careful what you tell me because I share all information with the founder.”
• I tell my founders before I invest that I value being transparent with one another and make sure it is an arrangement that works for them. I then beg them to do diligence on me because nothing compares to hearing the real deal from other founders.
• Investors need to give advice with empathy to earn trust. When I was a founder, an investor once recommend we burn less while growing revenue more (without any insights as to how we could accomplish that). That comment undermined the trust I had in that investor, as it suggested that the investor did not really understand the efforts all of us were expending to try to make the company succeed. In this case, I am not sure if this was the sincerity or competence that broke that feeling of trust.
• In order to build trust, investors need to listen more than they talk. Founders need to know that they will be heard and not just given advice.
• It is easy to be a trustworthy, value-add VC when a company is doing well. Founders should know how a VC behaves when a company faces challenges. So, don’t just talk with successful companies in the VC’s portfolio — make sure to talk to founders of companies where things did not go as well.

The value that comes from a trusting investor-founder relationship cannot be overstated for either party in the relationship and becomes a virtuous cycle. An investor will work her ass off for a founder when she knows the founder trusts her and shares all the relevant information. Founders are more likely to trust when they see an investor working her ass off for them. I recommend that both investor and founder begin with the assumption that the other’s intentions are good and over-communicate if and when there are any questions in the relationship. The dividends in a trusting investor-founder relationship are tremendous and worth the investment.