June 29, 2018 –
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Every entrepreneur has heard the advice: “Don’t just use your investor for funding; get the most out of your relationship.” The problem is that many first-time founders don’t know what “the most” really means.
In my experience, nothing helps a young startup like an engaged investor. Signs that you’re getting the most include frequent informal meetings, a steady cadence of helpful introductions and regular access to other investors at a firm.
Unfortunately, it’s hard to assess how ready an investor is to do these things before signing a term sheet. Questions like “Will you make time for me?” and “Will you help me network?” are easy to answer with an empty yes. But it’s possible to get past hollow promises if you know what to listen for. These four questions are designed to solicit answers that can help founders make informed decisions.
How often should we meet? Most founders realize they’re entitled to dedicated time from their investors. But I’ve found they don’t tend to take the lead in making meetings happen.
I think it’s important for a founder and investor to get together frequently for coffee, dinner or a weekend walk. These meetings don’t need a set agenda — for the first year, they’re as much about building a relationship and establishing mutual trust as talking through business problems.
As your company grows, the amount of time you spend with your investor will ebb and flow, but these informal check-ins remain critical. With some of my early-stage companies, I’m working alongside the founder trying to come up with the right product-market fit and go-to-market strategy, as well as helping to hire the best people. By the time a company is mature, I’m usually not involved with day-to-day problems, but I’m still a frequent sounding board for the CEO.
If a potential investor doesn’t suggest meeting weekly or at least every couple of weeks, it could be a sign that he’s overcommitted or intending to provide capital but not strategic help.
What can I expect at our board meetings? This is really just another way to tell whether your investor is planning to spend enough time with you. Board meetings can be productive brainstorms involving really smart people who have a stake in your success — or they can be a forum for debates among board members over quarterly results, burn rate or the departure of a key team member.
In the first case, the CEO has done a good job of communicating in advance of the meeting. And it’s another reason why regular, informal meetings are so important. Your board meetings will be more efficient and productive if you and your investor have already talked through any recent changes in your team, thinking or strategy.
By the way, too many founders believe that they always have to present their best face to investors and that any discussion of their concerns will be read as a vulnerability. I, for one, always value candid interactions and will be empathetic with what you’re going through. The benefits of having a frank and honest relationship with your investor far outweigh any risks. Besides, I strongly believe great founders grow into great CEOs and aren’t necessarily born that way.
Who can you introduce me to? Many entrepreneurs pick their VCs based on their prior investments. But they forget to take the logical step of tapping into the new network that’s become available to them.
Your investor should be one of your main evangelists and proactively make helpful introductions for you; his Rolodex is perhaps his most valuable business asset. You should expect introductions to CEOs of companies at your same stage and with some common focus like target customer, sales models or complementary products.
Your investor’s firm should also be able to introduce you to potential hires, customers, partners and investors at other firms that might provide follow-on financing. You should also expect introductions to industry experts who can help you on various fronts.
You can judge an investor’s willingness to make introductions before you sign a term sheet. Do they offer to introduce you to other portfolio companies, potential hires, customers or partners while you’re in discussions? I think that investors should offer at least three references while you’re doing your diligence — and founders should insist on them.
What else can your firm do for me? Among venture firms, services like business development, marketing and hiring support are now common. They’re useful and you should take advantage of them. But the philosophy and approach underlying these services vary.
One thing to look for is whether the firm customizes what it offers based on the founder it’s working with or whether it has a one-size-fits-all model. We believe an integrated approach is most helpful, where, for example, business development can help you reach product-market fit, marketing can help amplify your message, and talent services can help you articulate your culture and values — all working in concert.
Additionally, some firms take a team approach to investing with a second partner assigned to every company. Some CEOs take this as a signal that the lead investor is too busy for them. But, if both investors will have a complementary skill set and both will be fully engaged with you, you end up getting two-for-one value. There’s an easy way to tell how the firm you’re talking to sees it: If it talks up access to multiple partners while courting you, it’s likely an asset.
Choosing an investor is as tricky as it is important. Asking these questions — and knowing what to look for in an answer — can help ensure there are no surprises.
Originally published at www.forbes.com on June 29, 2018.