I recently wrote a piece discussing how all capital is not created equal and we are living in a period of super-abundant funding — in many ways, the best times ever for founders.
In this environment, every investor has a well-honed pitch on how they can uniquely add value. Being a founder of a high-growth startup means that you will encounter many situations you never have before, so choosing an investor who will be a partner in building the business is a key decision. In this context, promises of exclusive value-add resonate deeply.
Surprisingly, most founders find that the actual value they receive from investors is not always as promised. I have had the opportunity to work with amazing investors who build great thought partnerships with their founders, who are invaluable in making the decisions that change the trajectories of companies and have superpowers in attracting talent.
Venture investing is an apprenticeship business, and I am humbled whenever I get a chance to learn from a great investor. However, when I speak to founders, it’s more likely that the investors they picked exhibited a variety of post-funding archetype behaviors, all of which detract from value, not add to it.
In the spirit of helping founders look beyond the promises of value, let’s delve into some common archetypes of investor relationships that founders experience post-investment. I hope that both founders and investors will read through these archetypes with a sense of humor. Like a good episode of “Silicon Valley,” there is some exaggeration here for effect, but not much!
8 disappointing investor archetypes
The narcissist. Narcissists are completely full of themselves, and everything is always about them — how great their firm is and how great they are. They’re so enamored with themselves that they never take time to understand what founders really want or need. Some narcissists may be well past their glory days — just figureheads riding on their former successes — and they’re not going to add value to your startup.
The child with a hammer. This is the investor who tells you to follow their advice because, “We used to do this when I was at Google,” or, “When I was on Airbnb’s board, we did this.” They have a hammer, and every problem they see looks like the same nail to be pounded in — in the same way they did it in the one significant experience they previously had in their professional career. They lack the perspective that there could be 10 other ways to approach and solve the problem. Some investors also have a “fire the executive” hammer that can be particularly destructive.
The know-it-all. This is the investor in meetings who doesn’t want to hear anyone else’s opinions, including the founders’. “I invested in Facebook before their Series C, therefore I have all the answers.” They don’t respect founders or their fellow board members, which is damaging to vital relationships and board dynamics. They may also have silver bullets like “OKR” or “recurring revenue” that they are partial to without understanding whether these are a good fit for this business and situation.
The lapdog (aka the cheerleader). This is the investor who is never going to deliver the hard message to you — they’ll always try to be friends with the founders because they want a recommendation to the next company. They’ll pop in to a meeting and invite you out to dinner or on a lavish ski trip. Anytime there’s a difficult situation, however, they fall back on, “Whatever the founder wants is the right answer,” instead of being a thought partner and bringing a valuable perspective.
The service router. If you want someone with a fat Rolodex, then you’ve come to the right place with the service router. Need a CFO or a sales manager? The service router will point you to people but never aim for excellence or help a founder figure out what looks good, say, in a new VP of sales. Service routers are good at recirculating among their portfolio companies. The problem is that the talent might have done a fine job at one company but isn’t the right fit for your startup.
The Needy Ned. This investor will drive you nuts because they want to be involved in everything your company does, regardless of whether they’re adding value in the process. This might be the first company they’ve been on the board of, or they might be junior in the venture firm. You’ll know you’re dealing with a Needy Ned when they’re surprised and outraged when you haven’t told them every operational detail of your business. A more difficult version of Needy Ned is someone who not just wants to be involved but is trying to grab the wheel out of the founder’s hands and do things their way.
The numbers person. For this investor, business is a big, complex spreadsheet, and everything can be reduced to a number or a ratio. They usually come from private equity, investment banking or growth investing, and they typically throw around terms like revenue churn, ARR and “the magic number.” The trouble is, they don’t understand the story behind the numbers, and they don’t know what it takes to move them.
The drive-by. If you want your investor to stay out of your hair after they send some funding your way, then the drive-by is for you. They’re deal machines — even before your deal is sealed, they’re already on to the next one. By the time two years go by, they have completed 10 other deals and they’re not remotely interested in you as a founder or a company. They might attend a board meeting or two, but when they do, they’ll probably be checking their email to nail down their latest deal.
My thoughts for founders
Unfortunately, founders fall for these archetypes every day. As you consider your funding options, here are some things to keep in mind.
The person matters way more than the firm. Don’t buy the brand; buy the person. Perform due diligence on the person thoroughly and well. Talk to founders and dig into the references the investor gives you using your own back channels. Make sure there is a personality and style match among you, your co-founders and the existing board. In addition, make sure the investor’s knowledge and prior experience match your business.
Make sure both the person and the firm really understand your business. One good way to assess this is how much diligence they do on your product, and whether they personally talk to customers as opposed to reviewing call transcripts done by third parties. If an investor does not take the time to truly understand what you are building before they invest, what are the chances they will understand it after, and, more importantly, be a valuable thought partner?
Everyone is a good fair-weather sailor, but when there is a failure or small misstep (which, as I point out in my book, “Anticipate Failure,” will surely happen), the worst behaviors rear their ugly head. Examine how the person behaves when important decisions need to be made or when the going gets tough. One way to test is to ask the investor for references to their worst-performing companies and hear directly how they behaved when things were not going well.
Check for evidence of value-add and ask for it in writing in quantifiable ways in the term sheet. If they say they are going to help with hiring, ask them to write down goals for the first two quarters. If they say they can help with customers, ask exactly what amount of revenue they will commit to adding. If they say their brand will attract independent board members, ask to speak to board members they have placed.
If you take time to find a good fit with an investor, you will significantly maximize the chances of building something great. Even one bad investor on a board can significantly hurt the chances of your success, and I have unfortunately seen this happen a few times.
Don’t be lured by promises, valuations and check sizes — these are transitory, and the sugar highs from these shiny objects will last for but a short period. Keep your eye on the goal and pick your investor wisely.
Source: New feed