Are You Founder-Friendly or Founder-Aligned?
“Founder-friendly” is the buzz word on every VC’s lips. But what does it actually mean — and is it enough? Johannes Weber, Managing Partner & Founder at Ananda Impact Ventures, asks the question and finds that being truly aligned with portfolio companies is more important than just being friendly.
We’re currently in a founders’ market, with VCs queuing round the block to work with the best start-ups and trying to stand out from the crowd. One thing you can guarantee is that every investor will describe themselves as “founder-friendly”. Check the landing page of any random VC — it’s the first thing you’ll see.
But what does “founder-friendly” actually mean?
For many VCs, it’s an expression of fear. The fear of not being considered in the next financing round of a potential unicorn. The fear of getting a bad reputation by speaking truth. Which means that in difficult situations, they prefer to stay quiet and watch the drama unfold rather than intervene. Easier to sit out a crisis and bet on other portfolio companies than risk being seen as overbearing and high-handed.
Not that every VC should be a super nanny to their portfolio. But the attitude of many VCs these days is positively laissez-faire if things don’t go as well as expected.
Surely there must be a better definition of “founder-friendly” than that? So, what is it? We asked ourselves and a bunch of founders exactly that question.
Going on a treasure hunt
Let me cut to the chase and tell you what the short answer was: it’s not about being just “friendly”, it’s about being “aligned”.
Founders don’t need “yeasayers”. Instead, they want to be challenged in a constructive way. They want to experience some “tough love” if uncomfortable truths need to be spoken. But they also want to be valued for the effort they put into developing their businesses. And they want to be respected for the challenges they experience every day.
Let’s think of a start-up’s journey as a treasure hunt along the Amazon. Founders want their VCs to sit in the rickety boat with them. To get wet with them when it rains rather than jumping off at the next landing stage. They also don’t want VCs to alter the company’s mission against their will, turning a treasure hunt into a soulless tourist trip. Instead, they want their VC to help them stay on that mission.
The threat of mission drift
So, what does it mean to not just be friendly, but to be aligned with founders’ goals?
Most great businesses are created to solve a “need”, not just a “want”. This is what motivates founders, their teams and initially their investors, the bigger goal that has the power to move hearts. However, when things get tough, the company’s mission may be challenged and traded in for a compromised vision that people are less willing to fight for.
It’s the “lets-call-off-the-treasure-hunt-and-sell-the-boat-moment”. A downward spiral.
In particular with impact start-ups, this can be a fatal blow, killing the founders’ initial motivation and cutting the heart out of the business. It’s what we call “mission drift”.
This can only be solved if an impact business is aligned with the right kind of investor.
Seeing through impact washing
The problem is that today, every fund describes itself as valuing “impact”. How can founders be sure that their VCs aren’t just “impact washing”, and can actually be held to account?
The culture and make-up of a VC team is of course important in determining whether they have really bought into the idea of impact. But are they just founder-friendly or are they actually founder-aligned? At Ananda, we’ve gone one step further and directly linked our carried interest (the amount of money we take after returns to investors) not only to financial goals, but to quantifiable impact achievements of the start-up.
In simple terms, this means we help companies to set up impact KPIs and targets that are business-driven. If they don’t make their targets, we don’t see our carry. This mechanism avoids conflicts of interest between mission-based impact and financial performance because the VC’s return is tied to both. (If you want to know more about this method, look it up at EIF — it’s something we co-developed with them back in 2014 and which is used widely now.
So, my big tip to founders is to ask any self-described impact investor if their carry is tied to the impact of the companies they invest in. If it isn’t, they might want to think twice about working with that VC. They may be friendly, but they’re not truly aligned.
Resilience is crucial
A VC’s attitude to founders’ health and resilience is also a strong indicator as to whether an investor is aligned with a company. Founding a business is a tough job in itself, but doubly so when juggling family commitments and responsibilities. As a very engaged father of three, I know the resilience it takes to perform well at every level of life. As a VC, I want to appreciate the effort our founders put into all aspects of their lives — not just their business. It helps me to understand them as human beings and take supportive actions as necessary.
At Ananda, we believe that founders’ health and resilience are crucial to mission success. I sometimes wonder about co-investors who relentlessly focus on the minutiae of KPIs without trying to understand the pressures that a founder may be under. Founders are the make or break of any start-up’s journey, which is why mental and physical health is something we focus on a lot at Ananda through HR assessments and coaching, and simply by being a “Mensch” because we believe that resilience is a skill that can be acquired, a muscle that can be trained.
We take great joy in this. And there is enormous payback from it as well. In risk reduction, increased performance and authentic human interactions.
So, when you go on your next treasure hunt, ask yourself this question — do you want somebody on the boat who’s “friendly”, or do you want someone who’s “aligned”?
Johannes Weber is Managing Partner and Founder of Ananda Impact Ventures.