In my first article, I wrote that investors should adopt a relationship-driven and value-additive posture when interacting with startups and Founders. In addition, I recommend that investors actively work to discover their sources of value-add. The objective of this is to forge fundamentally genuine, trustworthy relationships.
Venture capital sometimes has a mixed reputation as a necessary evil along a startup’s success trajectory. How do I know if I have valued my company correctly? Is VC funding worth the equity I’m giving up? Will they deliver the value-add they say they’re worth? How do I make sense of warrants, protective provisions, drag alongs, full ratchets and anti-dilution clauses? Am I getting the short end of the deal? Perhaps as a reaction to this, funding entities are adopting a friendlier posture towards companies. This is sometimes manifest in the saying ‘founder first’.
In a company’s early stages, a well-networked, experienced mentor’s guidance easily delivers meaningful delta. It can be advice on structuring your term sheet, an introduction to another founder or a fresh set of eyes on a business plan. As a general rule, I’ll always make 5 minutes to listen to a Founder who cold-calls me. I believe this to be our first and foremost duty as early-stage investors.
The investor’s foremost guiding principle is to be FOUNDER FIRST
I have had the pleasure of interacting with many accelerators, incubators and VCs in the past and have always been impressed by Techstars (Shoutout to Don Loeb, Laura Kennedy, Morgan Berman and Kevin Tapply). ‘Giving first’ is codified as Techstars’ first principle in their code of conduct. They recognize Founders and Mentors who epitomize this in an annual award.
Figure 1 Techstars code of conduct
My version of giving first is to ask Founders on my very first interaction:
“How can I help you be successful?”
Asking this question first and early achieves the following:
- Safe zones:Since we have no meaningful relationship, there are few expectations to be had. As a matter of principle, I will give you the 5 minutes you deserve and help you if I can.
- Power dynamics:The investor-founder relationship has a set power relationship. Asking this question first sets the dynamic quickly and lets us get down to business.
- Creating reciprocity:I believe that genuinely good Founders will actively seek out ways to reciprocate. This establishes mutual trust and adds value to our respective networks.
Their response also serves as a litmus test on the deal (assuming it’s the right time). I’m seeking answers to the following questions to quickly assess if it fits into my investment thesis:
- What stage is the startup at? Do they have an idea, prototype, beta, paying customers?
- Is there a specific problem they are trying to address? Do they have a compelling solution to this problem?
- What is the target segment and where are they?
- Is this a technology or application solution?
- Technology solutions: what specific competitive advantage does this technology have over existing ones? Are the economics competitive? Do protections exist that make this technology proprietary?
- Application solutions: how does the application create superior value & UX for all players in the business model?
- What is their ‘ask’ and does it make sense?
There are some clear lessons here:
- Angels:Do you have an investment thesis and are you sticking to it? If not, how can you figure this out? (Stay tuned for a future article)
- Founders:The above is a recipe for your pitch deck. Serve yourself well by thinking through these elements clearly before you approach investors.