There is a lot of conventional wisdom out there. Most people are happy to share even when not asked to do so..
And often it sounds really smart. I am referring to the kind of things that just make sense when you hear them. For example:
Founder A is looking to raise money for their startup. They will ask fellow founders, friends, family, investors, read blog posts and listen to podcasts. She will hear statements like the following:
“Take whatever you can raise. Raising $1M is the same work as raising $2M or $10M so raise more if you are already raising.“
“Diligence your potential investors. Be sure they add value beyond capital and that they will be there for you during the hard times and not just the good times.“
“Raise only what you feel is completely necessary. Grow through hustle and hard work to create value that will be recognized in the next round’s valuation terms.“
These three statements all make sense but could actually be contradicting each other. The best board member may not have the deepest pockets. The more capital you raise, the faster you can grow, right? Or are hustle and grit more important?
Let’s take this one step further.
Investor B is considering an investment. In “VC school” they were taught the following:
“Never miss investing in a great company because of valuation.”
“Be sure to make the numbers work because it is all about returns to your LPs through your ownership percentage.“
Both are really important points. Which often contradict each other. This exacerbates the challenge faced by our Founder A above as she tries to develop her fund raising strategy and navigate the process, balancing the feedback she receives from each pitch.
Creating a balance and clear path from all of this good advice, is not simple. It is the “art” part of venture capital. Different funds have offered alternative approaches to solving this.
The large firms – A16Z or First Round Capital – have done a great job of creating value beyond their capital and an ability to support companies long-term. They are truly great investors and not just a brand name. But these types of offerings are limited to large funds who generously invest portions of their management fees (the larger the fund the more fess there are to go around) towards creating these support systems for their portfolio companies.
Smaller funds need to be more creative. A lot of the value is added through the active involvement of the investing partners themselves, with limited support staff if any. This makes the balance a lot trickier. I really like the approach created by Founder Collective (and now copied by many other small funds including SapirVP) by which they focus on getting all their capital in early and then position themselves to be diluted alongside the founders. This creates an alignment that I have found valued by most founders. In return the founders are willing to give up a little more equity in the early round so as to have such an investor onboard and in their corner for the subsequent rounds.
Both approaches focus on value-add investing. These were the best type if investor I’ve worked with and from whom I learned much. Now it is our turn to provide this for the next generation of great founders.
I think it is important for Founder A to remember that when an investor says that they are “founder friendly” that does not necessarily mean that they are exactly on the same page. There are different interests at play. Maintaining this balance is not simple and can often derail an investment process. As I am constantly reminded. But when the balance is established great achievements can be realized together.
For further reading on this topic I suggest Jeff Bussgang’s Mastering the VC Game.