Lesser-known Ways of Choosing Your Investors
…. But first, a few words on “choosing”.
In startup vernacular we talk a lot more about companies being “chosen” by investors than companies doing the “choosing”. Companies “earn”, “win”, or “secure” funding. They “apply” to Y Combinator. Startup X gains status when Marc Andreessen invests in it; but Marc Andreessen doesn’t gain status because Startup X let him invest. Haven’t you ever seen Shark Tank?
Okay. I’m not here to deny that power imbalances exist. But I do want to say that no founder is required to buy into the particulars of this dynamic; to this persona of the supplicant, the applicant, the one who auditions.
Anytime you abdicate the role of informed buyer and instead decide that you desperately need something without consideration of opportunity costs or price, you allow yourself to be conned. I’m not saying that you should be a dick to anyone. But please scrutinize your potential investor-partners as hard as you scrutinize your potential executive hires. In fact, please scrutinize the entire notion of fundraising and whether you should be doing it at all.
Always be a chooser. You might not be able to control who gives you a term sheet, but you get to choose who to approach, who to nurture, and who to partner with. Choosing investors poorly can wreck your entire business. It can get you fired from your own company. It’s bad.
You can find summaries of what to look for in a potential investor-partner here and here and here. I’d like to add a few criteria that I don’t hear discussed as often.
(1) Why are they in this business? How do they think about themselves and their identity as professional investors? What do they love about their job? Why are they doing this?
Broadly speaking, investors bucket in the following main categories:
They are technologists / product people / geeks
They love startups & being part of the startup ecosystem
They consider themselves to be business-builders and students of the art of growing companies
They love the role or status of being a professional investor or VC
They’re in it for the money & perks
Each of these has various pros & cons, and tends to be more or less common depending on the stage of investment. For example, #1 and #2 are common in the pre-seed & seed world. #5 is more common in growth. #3 and #4 are sprinkled throughout. I am massively oversimplifying here. But you really should get a read on which motivators are most important to the investor(s) you’re considering partnering with. It will impact how you communicate with them & allow you to anticipate some of their future decision-making (important if you are giving them a seat on your board). It also hints at when/how they'll help you in the future — and when they won’t.
If I may give one biased opinion (seems fair — it’s my blog), I recommend having a slight preference for investors from category #3 and including some of them in your mix when you can. If you’re considering taking on investment capital, you’re probably interested in building something big and important and lucrative that can make a positive difference in your market and ideally the world. Having partners aboard who are more interested in that exact task than the specific tech under the hood (1), whether the company is cool or not (2), or whether they are cool or not (4), can be a strategic advantage for the company and a salve for your personal sanity.
Category #5 is pretty benign, by the way, and shouldn’t be viewed as a negative. I’d definitely be more worried about investors in category #4 than #5.
(2) Are you aligned on the long-term fundraising plan? It’s amazing how often this is left unstated or presumed. Do they plan to introduce you to a bunch of downstream bigger-check investors to lead the next round? Are they hoping you can get profitable so this is the last money you’ll have to raise? Do they plan to lead your next round if things are going well? What’s their gameplan? Does it sound good to you?
What if their model is markup-driven, and you don’t want to raise any more capital in the future?
What if they have a concentration/follow-on strategy, but your company plateaus and the investors become reluctant to invest any more capital?
Have you asked?
(3) Are they in love with your company? Everybody is obsessed with the idea of “investor value-add”: How a particular partner or fund is going to help your company succeed. Whether they have a background or a network in your space. If they have a “platform” or a brand. Etc.
You know what’s an extremely underrated form of value-add? Investors who are in love with — nay, obsessed — with your company or business model. The difference between investors who promise to help and those who actually follow through is whether your company occupies a significant percentage of their brainspace. The companies that VCs think about at the gym or in the shower (don't think too hard about that) are those the get the intros, the referrals, the random-but-potentially-interesting ideas, and the follow-on capital.
If you are deciding between multiple investors, this is potentially when you’d want to take a chance on a younger, less experienced investor over a well-connected brand name — if the greener investor is completely obsessed with your company whereas the famous one can’t stay focused long enough to remember what exactly your startup does, that tradeoff may be in your favor.
Again, this is why the VC nurture strategy can be so advantageous — it helps you identify which investors are your obsessives. If your potential VC starts shooting random ideas at you over e-mail at 3am, that’s a good sign (even if the ideas are borderline).
(4) How do they represent your business? Once your round closes, there might be certain circumstances where your VC is addressing a large group of people about the company (like if they say a few words to your team on an office visit, or at a conference, or maybe on TV). Does that prospect excite or terrify you?
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