They say taking on investors is like getting married. That means the art of “picking” has very real consequences, beyond just the dollars in your bank account and the brand names in your press release (or, in each case, the lack thereof).
For those of you who have already raised, however you picked – right or wrong – the title should resonate. For the lucky (and skilled) ones, you may find yourself saying, “Thank God I took x as my investor!” Or, for those less fortunate among us, you could be left wondering, “What the … was I thinking? :(“
If you haven’t yet picked, read on. If your options consist mostly of investors you have just met, by definition you only know how those people act when the times are good. Do some work to talk to people who have worked with your investor when the times are difficult (broadly, in an economic sense, and more narrowly within a single company’s journey).
Almost all start-ups have what I call “a Justin Beiber moment.” No matter how easy your fund raising or how perfect your trajectory – Something. Always. Goes. Wrong. This could be as bad as being caught on film in an alley with a bucket or it may be as mundane as pivoting through early mistakes. Regardless of what form your tough times take, you’ll want to know that you have an investor by your side who’s as much an ally when the luster has worn off as she is in the glittery early days of your relationship.
In those up moments, many forget to do some homework and instead focus on reputation and the factual details of a deal.
For example, I find it incredible that so many entrepreneurs come to VCs in a first meeting with a message along the lines of, “We will make a decision on term sheet in 2 weeks. How does that timeline work for you?” The question should really be turned back to the entrepreneur. If you have enough investor demand to put intense time pressure on closing, why would you decide to marry someone after only two weeks of getting to know each other? It is always best to get to know potential partners as early as possible, as this extended courtship makes it is so much easier to asses whether that relationship will flourish in good times and bad. If you are reaching out with 2 weeks left with the hopes of getting a better economic deal, it is almost certainly better to go with the bird in hand you know. If you are reaching out because you really want to work with that investor, then give the relationship time to breathe.
Here’s how I see the hierarchy of potential relationship impact (defined by likelihood of affecting one’s happiness and prosperity):
#1 Marriage/Romantic relationship
# 3 Investor
#1 Romantic Partner
Having a the right life partner will make you better in almost every way. Research out of the University of Washington found people with reliable partners do better at work and make more money.
Personally, I have found having someone at home who helps to bring me out of the lowest of the lows and down from the (very occasional) ego-driven high, really helps me keep my head on straight. Perhaps anecdotal, but I find it helps not only to be loved, but also to have someone to tell you when you are being foolish and should fix mistakes, tail between legs. As motivational speaker Jim Rohn says, you are the average of the 5 people you spend the most time with. This is true of dating, friendship, even family (though the choices are a bit predetermined there).
For any entrepreneur, picking your co-founder is a very close second when it comes to important relationship decisions, and it’s the one around which you have the most control. So many co-founders come together either quickly or without going through a rigorous process to set the right foundation. The best tend to have known each other for years prior to starting-up and thus have typically been through enough tension-filled moments to know how each other will behave.
Questions to Ask: What is driving each of us to go on this journey? Do we define success in the same way? How will management responsibilities be divided up? When and how should we on-board new team members? How should equity be split? Could this split create problems down the road? If so how will we handle? What will we do if one of us wants to leave, or (similarly, but not the same thing) if it’s in the best interest of the company for one of us to leave?
Being a cofounder is perhaps the hardest and most rewarding professional relationship I have ever had to negotiate. More in the future on this topic. In the meantime, Noam Wasserman is the leading researcher on the founder topic – read his great book if you want more (or enroll at USC business school where he has just moved from HBS!)
In a way, the investor relationship is the trickiest because you don’t see them everyday, so you end up having a periodic, yet deeply intimate relationship (with many of the same inherent challenges of a long-distance, romantic relationship). The investor role may at times be very hands-off and at others just as hands-on. When issues arise between co-founders, for example, an investor is often your mediator. When you are looking for advice on a key business decision, your investor may help with an opinion (solicited or not). So ask yourself, does your investor aspire to be a sparring partner who can agree to disagree, or prefer to play a more hands on role?
When I raised capital as a startup CEO (at Seedling, fka PSXO), Mark Suster led my round and Dana Settle also played a big role (both in terms of capital and connecting me to my co-founder). I had known both Mark and Dana for years. And even so, Mark encouraged me to do a significant level of due diligence on him, as we were taking on a different kind of deeply-committed relationship. It felt a little strange given the the relationship, both professional and personal, I had had with Mark over the years. But I did it, nevertheless. Among other things, I spoke to many of the founders Mark had backed previously so I could get a sense of him as a potential board member and how we would work together in times both good and bad. The feedback was inline with what I thought I knew about Mark, but having this level of added reassurance made our founder-investor relationship that much healthier and more open from the outset.
That last point is an important one as chemistry is critical to every successful relationship, especially so in the lead investor/founder relationship. Why? Well in the best relationships, your investor is often both your harshest critic and your biggest cheerleader (sometimes in the same meeting). Having both sides understand how each likes to communicate, receive feedback, show vulnerability, etc. is vitally important. Chemistry and history are impossible to fake.
One of the biggest surprises in my time as the CEO of a start-up was that one of the most important roles Mark played was to help remove pressure at times when I was placing so much pressure on myself, it had become counter-productive. And that’s one of the many reasons Mark was the right investor for me – he knew when to push and when to relieve. He also helped immeasurably with key hires, PR, and to debate critical strategic issues. We agreed only some of the time and we certainly had moments where we vigorously disagreed, but the process usually made me better, and by extension my company.
So on this Thanksgiving, I am thankful for many things personally, including that I did my diligence and picked the right lead investor. And now I always recommend that any potential founder I fund do their own diligence on me.
At Upfront, each partner only makes a few investments per year. I want to make sure any founder I back wants to work with me and that I’m confident we have a great chance of working work well together. Accordingly, I’d like to get to know entrepreneurs as early as possible, as much for their sake as for mine.
I could not be more serious about this- I lived it and so will you.