The Two Way Street: A VC Investor On What We Look For in Companies

At this point, dozens of articles, blog posts, tweets, and longform pieces exist that work through the basics of startup investing. They tend to zero in on specific questions regarding the entire process, but one rarely finds a collective catalog of advice. I spent 3.5 years within the venture capital world helping to start and run an early-stage consumer-focused firm called Brand Foundry Ventures, and now as I return to that world this summer (stay tuned), being away from the industry for a year and a half gave me some time to think about how to create that catalog. As a result, this article addresses 6 key questions often asked.

Where Do I Start?

Ok, so you’ve decided to raise money. There basically exist two kinds: Angel Investors and Institutional Investors.

Angels invest with their own money. Check sizes can range all over the place, but the two major advantages to angels is that (a) they’re not tied down by outside forces (except themselves, of course) to make a return over a specific timeframe, and (b) they can often be your biggest cheerleaders. They can sometimes be too involved with your company, but remember, this is YOUR company and they’re working from the sidelines.

Institutional investors, simply put, invest with other people’s money (and a bit of their own). They raise capital themselves from investors (known as Limited Partners) and are expected to make massive returns on investment (in other words, multiples of over 6 times their initial investment on average). Within Institutional Investors, you have Venture Capital firms (or VCs, which we’ll focus on here), Private Equity firms (which are later-stage investors, usually investing in profitable companies), and hedge funds (which usually invest in publicly-traded companies and larger global economic securities).

So why look at VC? They’re great for larger checks (if needed) and often for getting some major doors open. But, as First Round Capital’s Josh Kopelman once said, VCs “sell rocket fuel.” Expect the company to grow much more quickly but also expect to be spending more money on areas like marketing, hiring, and development. (More on those areas later.)

Additionally, VCs need to expect that return within 3–5 years of investment (with the stretch usually being 7 years), so once the money gets wired, the clock starts ticking.

Should I Raise?

As we look at investors, you as a founder also need to ask an important question: does it even make sense to raise money?

According to a report by Fundable many years ago, at that time:

• Less than 1% of founders took money from angels and venture capital firms.
• 57% of startups raise money through loans or credit lines.
• 38% also raise through friends and family.

Here’s the report if you’re interested in reading more.

I’m not saying that founders should entirely scrap venture or angel investing; it’s more about breaking the stigma that they ABSOLUTELY have to in order to succeed. A company that I’ve known for many years (and even worked at for a short period of time), Baron Fig, has never taken any outside funding; they’ve been around for 6 years and should do over $5MM in revenue this year. Oh, and they’ll be profitable.

All that said, if Baron Fig took outside funding, there could be a chance that they could be making triple or quadruple that revenue right now. But slow and steady isn’t a bad option either. It’s all about perspective.

What Do They Look For?

We’ll focus on early-stage investing here. Regardless of kind, investors look at People, Product, and Pipeline.

PEOPLE is arguably the most important of the three because if an investor has put money on a great team with the wrong idea, they can change the idea. It’s much, much harder to change the wrong team with a great idea (as management shifts almost never go well). That said, there are two key areas to focus on here:

1. Role Recognition. There are three main roles that investors are expecting to be represented: the Marketer, the Operator, and the Technician. I’ll go deeper into each three in the next section, but it’s so important to see them within the team as well as if they’re lacking (and if the investor could possibly help fill it).
2. Team Cohesion. While leadership qualities and capabilities are so important to identify, the team has to consistently be open to advice and feedback, even if part of it is bunk. It’s about looking for the “periscope” of the team; founders who are arrogant, resistant to advice/feedback, and worse, defensive, lack a periscope in a submarine (the analog solution to a high-tech device) and are simply running straight into a wall of danger.

PRODUCT analysis is more about the completeness of each stage, from ideation and concepting to development, testing, and feedback from initial customers (if that exists). Founders should ultimately look to establish a sense of comfort with potential investors and not a concern about gaping holes that may exist in the product or business model. Uniqueness matters!

PIPELINE analysis is all about forecasting the future (particularly the next 2–3 years). It’s broken down into two areas:

1. Hard Futures: What key features of the current product are coming up down the line? Are there other tangible (or intangible) products coming up and when (approximately)? How is the team thinking through this?
2. Soft Futures: What digital (and offline) channels is the company looking to go into and/or launch? (Social media, retail/pop-ups, influencers, site-focused marketing, etc.) What are the key timelines here?

Once again, I cannot stress how important PEOPLE matters here.

What’s My Role?

As mentioned above, the key roles within a company are the Marketer, Operator, and Technician (if there’s a signifiant tech-enabled part to the business). So what area do you think you fall into?

• The MARKETER is the face of the franchise. This person is able to pitch the company and its journey day in and day out. They’re the ones doing the articles, the interviews, and fireside chats in between. They thrive on telling that story.
• The OPERATOR is the architect behind the scenes. This person works on the internal plumbing and manages all the operational aspects of the company. They’re able to go out and tell the story, sure, but it’s more about being able to get into the deeper aspects of why the company they manage is strong and will continue to be.
• The TECHNICIAN only applies, again, if there’s a significant tech-enabled piece to the business. That said, this person replicates an OPERATOR role but is entirely dedicated to the technical and digital aspects.

Within these definitions, what companies do better: one with a stronger Marketer, or one with a stronger Operator/Technician? To be honest, it’s usually the latter, but a company regardless of its role strengths can be ultimately successful as long as they are AWARE of what areas they lack in and are dedicated to building up those weaknesses. Awareness truly matters.

Who’s the Right Partner?

In the world of startups, approaching and negotiating with investors can feel absolutely daunting. That said, both areas have been, and especially are these days, a two-way street. Just as investors are working out the quantitative and qualitative research and determining whether they want to invest in founders and their startups, founders should also recognize that they need to do as much research about the firm (and especially the teams involved) as possible.

Some people compare this “street” with the world of dating, where you have to go out and play that game until you find the one true love. I personally compare it to a military operation; the founders and investors should feel so comfortable with each other in that they’re figuratively in the same trenches together. Both sides need each others’ success; the founders should look for the ultimate “value-add investors” (either simply by being able to provide capital and encouragement, or even with resources and network connections to help them grow), and the investors should spend as much face time as they can to the teams they’ve invested in.

Unfortunately, this doesn’t happen as often as it does, but because there is significantly more capital out there for startups to raise from, the advantage these days is in their teams to be more critical and expectant of how and what their capital sources can do for them.

How Can I Meet Them?

A lot of articles talk openly about “The Warm Introduction.” It’s definitely arguably the best way to connect with an investor and get their attention, and “warm intros” usually happen as long as the founder provides key context for the conversation (e.g., the investor wrote about something that the founder is working on, they’re invested in the space, etc.). More importantly, founders should recognize that they may have a lot more “warm intro” opportunities than they expect, whether it’s through friends and family, fellow entrepreneurs, great intermediaries (startup lawyers, startup bankers, founder coaches, digital marketers, etc.), and people in between. The most successful way to find that connection is to be open and honest on:

1. What you as a founder are working on,
2. What issues you are facing, and
3. What you believe you need to be successful.

All that said, cold connections do work, but it, like warm intros, CONTEXT MATTERS. If founders write something thoughtful, genuine, targeted, and concise, there’s a very good chance the investor will write back, ask a question or two, and more importantly, be up for a chat or coffee. This style also works if the investor you want to approach is speaking at an event or conference.

Being thoughtful, genuine, targeted, and concise should also be key life mantras, but that’s for another article for another time.

Tying Everything Together…

Launching a startup can feel like the most exciting time in your life. It also is a bit of an emotional roller coaster, where there will be times that it’ll feel like the loneliest place in the world. But if you stay true to your principles and what your company (and ultimately, your brand) stands for, you’ll find not just a community of users happy to try and stick to your work, you’ll find the right sources of capital.