In my own experience of starting and running VC-backed companies, I learned that having not just investors, but the right investors makes a huge difference.
When I raised a series of VC rounds I was often blinded by the promises of “value-add” that the VC would pitch back once they liked the business and wanted to offer a term-sheet. In a situation where you are eager to close a round and continue to execute a growth plan, it’s often easy to forget to perform a due diligence on the investor, to make sure that it’s a good fit and that indeed there is more value add than just cutting fat cheque for a sizeable part of your hard earned business venture.
Inviting investors to your company is a bit like a marriage that will often last for years until the point the company reaches an exit, be that a tradesale or taking the company public. During this time, you will no doubt go through sticky moments when a quarter did not deliver the numbers, an important milestone was not met or new competition arrived. This is normal in most growth companies that constantly need to re-evaluate its strategy, competitors and perform so-called “pivots” to adjust the business to reach the perfect product/market fit.
It’s during these crunch moments you will realize if your investors and you are good team-mates, as no doubt your VC will have one or more seats on the board, and a class of shares that gives them the right to call certain important shots (even firing you as the CEO if they like).
So how do you know if the investor has the chemistry and style that fits your and your company’s culture and needs? It’s difficult to tell unless you really work together for a while and a 4-8 weeks due diligence is often not enough to tell you if you are going to be in a happy and constructive partnership.
My recommendation is to spend a lot of time with your potential investor and really understand their style and expectations. It’s best to do this outside the formal settings where you really don’t get to know who people really are. It’s also definitely worth talking to their other portfolio companies’ CEO’s and find out what they think. It’s also key to know who from the VC will be on the board and that you get along with this person on both a personal level and share the same view of how the business will need to be driven forward.
Another key aspect is the investors’ understanding of your industry domain, and what specific experience and networks they have to challenge you to think smarter, make better decisions and accelerate growth.
If you already have other investors such as angels, it’s also important to make sure that they are aligned with the new investors. All too often, negative energy is generated when the team dynamic of CEO, founders, investors and board does not align. It can even lead to stress filled board meetings where you need a week to recover!
On the contrary, having a functional investor/founder relationship where the board truly challenges you as the CEO and brings out the best in a well composed board, you will be looking forward to board meetings and developing a high performance team.
So don’t be too eager getting that big VC cheque without doing your own due diligence, not just on the terms of the deal, but who you will getting married to for what hopefully will be a fun and rewarding experience building your business towards a big exit! As always, it’s all about the people!
Happy Investor Marriage!