You and your co-founder are building something to change the world. You know the road will be difficult, but you believe in what you are doing. You have raised not only seed capital but have also attracted a brand-name investor in your first round of venture funding.
Most things are going well: you’ve got a few believers who’ll be evangelists to win early customers, and you have the stamp of legitimacy that comes from taking capital from a brand-name VC. You’re making more connections, recruiting is getting easier, and you are now well positioned to build something that lasts.
You’ll need more capital soon. How do you go about raising your next round of financing and get the highest valuation? Do you go with another traditional VC? Look for an investor who has a nice personality and plays well with your existing brand-name investor? Try to get a few deep pocketed “strategic” investors who can take months to make up their minds, come with strings attached, and don’t really commit to anything except vague references to how big their company is?
If you’re thinking about creating a smart syndicate, your choices become immediately clear.
Is your Syndicate Smart?
A smart syndicate is all about surrounding yourself with complementary, orthogonal investors who can help when the hard work of building a true minimum viable product, acquiring customers, and scaling a business begins. They add value. The more additive they are, the more time and capital your startup gets to grow into a successful enterprise.
Cash is just that, cash. Having more of it helps, but there’s no multiplier: $10 million from a wealthy novice plus $15 million from a no-name investor who doesn’t typically wade into your market is $25 million, and that’s it. And it almost always ends badly.
You know the stories. Hot startup raises a ton of cash from inexperienced angels and one or two industry insiders who don’t know much about acquiring customers and scaling a business. Three years and hundreds of millions later, the once-hot startup is relegated to history’s scrap heap.
Now think of the alternative. Instead of raising capital you’re vetting seats around the table. When you find an experienced investor who’s also willing to help validate the market and introduce you to customers, you’ve found a multiplier. When you’ve found someone with experience getting beyond a minimum viable product to create a development roadmap, you’ve found a multiplier. When you’ve found someone with the resources to scale operations and go global, you’ve found a multiplier.
Every multiplier adds necessary leverage for the muscular job of turning a startup into a scaled-up enterprise. A smart syndicate is a board of multipliers, and they’ll multiply your effectiveness as a management team.
How to Choose Wisely: Beware the Passengers
Think of building your syndicate like you would any professional sports team. The right balance of high-powered offense and stingy defense wins on the field. Great teams have both, and so do smart syndicates.
Here, the offense is your early investors. They get you going. And if you’ve a top-tier VC in your corner, then you’ll not only have serious financial backing but also the wherewithal to raise additional capital from your choice of follow-on investors.
And that’s where the work begins, because the incremental value of adding another financial investor can be negligible when the muscle work begins. Because the investor that brings cash and little else is a passenger not a contributor to your journey. At that point, your smart syndicate should include investors who can add value that is complementary to what your existing top tier investor brings, like helping build and scale your company. That’s good defense for an entrepreneur trying to make best use of scarce capital.
What about big-brand “strategic” investors? When investors put their needs before yours it doesn’t matter how much money they bring: they’re destined to be troublesome passengers in the boardroom. Why? They’re at odds with you and others who would want to build something for the long term. Their needs are best served by taking out and “tucking in” small companies before they become threats. The last thing you’ll want is a boardroom fight between these competing camps when the time comes to make critical decisions that will determine your future.
next47: An Ideal Partner for Entrepreneurs and Financial VCs
We’ve built next47 differently, as a new style, 100% independent venture firm with access to the global resources and customer base of Siemens. We also have a worldwide team of 40 people with specific engineering, sales, support, and marketing expertise to help startups through the heavy lifting phase of their development.
And like all top-tier investors, we are incentivized to build something big. We move fast, make our own investment decisions, and are aligned with the teams we invest in; identical to a brand-name venture firm. In that way, we have not only the resources to contribute meaningfully to a smart syndicate but also the motivation to take every startup we work with to the next level.
Everyone wins: founders, financiers, and the employees working together change the world. Isn’t that what we want out of entrepreneurship? Because if it’s only about the take-out and tuck-in, then it’s time to rethink the model.