A Guide to the Successful Founder-VC Relationship
Founding and running a business is an undoubtedly difficult task regardless of what industry you work in, but likewise there are some things you can do to make it easier on yourself that will help across industries.
Any business owner who’s starting out knows how essential it is to obtain investors into your company. Acquiring investors is a task in and of itself, but how can you ensure you’re maintaining a positive relationship with the providers of your venture capital (VC)?
Keep reading to learn why it’s important to have a good relationship with your VC, what to look for prior to working with one, and how to make certain that you’ll work well together in the future.
Delving into the Dynamic
The relationship between founder and venture capitalist is very unique, and very important. Many types of investors— stock market, bonds, real estate, you name it —may not work closely with their clients, but this is not the case here.
When you form a relationship with a venture capitalist as the founder of a business, you are agreeing to a long-term arrangement. Term sheets are typically signed for five to ten years of business together, typically more, and breaking a contract early can get messy.
Founding a company and investing in a start-up are both risky, so both you and the venture capitalist you end up working with have to want your business to succeed. Not only that, you both need to work for it.
You’ll be in constant communication about what’s best for the business and how to help it succeed, and you’ll have checks and balances for each other along the way.
Why is this relationship so essential, though? Well, for starters, venture capitalists are most interested in investing in companies with a lot of potential for growth, which means that a start-up company could be a prime candidate.
Without any investors, it’ll be much more difficult to get your business up and running. Finding investors for a new company can also be difficult, but venture capitalists may take greater risks because of the potential for greater reward!
As a source of income, venture capital can often give early-stage businesses the push they need to find success, and that success will generate a return on investment for shareholders, so it can be a win-win if the business does well.
Venture capitalists also often have a lot of knowledge in the industries they choose to invest in, and so can act as something of a mentor for founders in the early stages of a company. If you’re looking to grow your business, they could be a great source of not only income but also invaluable advice.
Additionally, a well-known venture capitalist deciding to work with you will make you more attractive to other investors. It will at the very least help you achieve more publicity, and potentially draw in more funding.
What to Look For?
Since the relationship between founder and venture capitalist is so important, you’ll want to do your due diligence before signing any contracts. Research venture capitalists in order to find one that could be a good fit.
Lots of different kinds of venture capitalists are out there. Some may take a more hands-on approach than others, and some may not have a lot of experience with your type of business. These things are important to consider.
You’ll want to ask questions about the work they’ve done in the past, and possibly even get in touch with some of their references. Find out about their past business successes so you can establish credibility.
It’s especially important to look for venture capitalists who have had a hand in building up businesses in the past, so that you know they can do the same for yours. A VC’s connections become your connections once you start working together.
Additionally, consider the team of people who work for them at their firm. You’ll want to make sure that they’re a good fit, too.
Inquire as to how many deals the venture capitalist does per year and how many boards they’re on, because that will show you how much time they’ll have available to dedicate to your business.
On the subject of time, look for someone who respects yours. If a venture capitalist is showing up late to early meetings, then you shouldn’t sign with them. The last thing you want when starting a company is to bring someone onboard who will slow down the process instead of speeding it up.
In addition, it’s super important that you find a venture capitalist whose working style is compatible with yours. Spend a lot of time with a potential investor before deciding if you want to work together going forward.
You’re not looking for a friend, but this is a long-term relationship, so make sure it’s someone you can comfortably communicate with. It helps if you start out with some things in common. A venture capitalist should also challenge you in a respectful way, and be able to offer valuable insight.
Last, but certainly not least important, you can and should be selective. Founders have more leverage in the market right now, so take advantage of that. Find someone who you think would be the perfect fit, and then negotiate to make sure you get a good deal.
What will Venture Capitalists Look For?
There are likewise a lot of qualities that venture capitalists look for in founders before choosing to work with them, since it is meant to be a long-term relationship.
For starters, you need to have a very in-depth understanding of your business model as well as a clear plan. Before you begin pitching your company to venture capitalists, know your short-term and long-term goals as well as what strategies you will implement to achieve them.
Be prepared for venture capitalists to ask you tough questions when you meet with them, and be prepared to answer. You should be able to clearly and succinctly communicate the information they’re looking for.
On that note, financial projections and details about the market you’re targeting are absolutely vital. For example, how much competition will you have? Venture capitalists are more likely to work with you if you are pitching a product or service with a large potential market.
They will also want to know about the team you’re working with, so give them insight into the experience of your employees as well. Founding a business means knowing how to delegate, so having people that both you and a VC can trust to do their jobs well is very important.
You should also put a lot of thought into who you put on your board, even though that is a step that may come later. This can be just as important to a venture capitalist as you have working with you directly.
They’ll also want to work with a founder that they know they can trust. Demonstrate your integrity, authenticity, and responsibility in order to convince venture capitalists that you mean business.
Show them that you are aware of the risks in starting a company, and that you’re ready to rise to the challenge.
How to Work Well Together
Once you sign a contract with a venture capitalist, you should make every effort to keep that relationship successful.
First, remember that you can and should ask for help. Venture capitalists exist to provide you with assistance in more ways than just the financial. If you come across an obstacle that you think they could help you overcome, reach out!
Once they’ve invested money in your company, they’ll also benefit from your business doing well. Whether they’re providing insight or additional connections, you should take full advantage of this relationship.
Founders who take the initiative and get in touch with their venture capitalist more than just for quarterly meetings will most definitely get more out of the relationship. This will, in turn, lead to a more successful business.
It stands to reason, then, that communication is absolutely key. Getting in touch with your VC for their guidance is vital, and so is making sure that they are receiving regular updates about your business progress.
Keep your updates concise and keep them frequent. You never want to make your venture capitalist ask before receiving important information, so be sure that you’re always keeping them in the loop.
Send regular executive summaries— both within the body text of your email and as document attachments for their files. These should include highlights and lowlights you’ve experienced since they last heard from you.
For example, your venture capitalist will want to know about any significant achievements or milestones. Likewise, inform them of challenges, issues, and losses.
You should also include any requests you may have for your VC in your executive summary, so list some areas in which they can provide their assistance. Explain why each task is important and how it will help the business. After a request is completed, always follow-up with a thank you.
More technical updates can revolve around detailing your KPIs, or your Key Performance Indicators. Your venture capitalist will definitely want to know this data. If you’re outlining a plan for next steps, say what your target KPIs are.
Some other things you can include in your updates are new hire information, big news in your product’s market, media mentions of your company, and any other details that you think it important for your VC to know about.
Sharing the bad news is just as important as sharing the good. In order to maintain a successful founder-VC relationship, transparency and communication are essential. In order to handle a potential problem, everyone should be informed. Be honest, even in moments of crisis, and remember that your VC will want to help you.
Venture capitalists have your company’s best interests at heart, just like you do, so be patient and receptive to their feedback. Make responding to their advice a priority in order to keep the relationship on the best of terms.
If you ever come to a disagreement with your VC about what’s best for the business, keep the conversation constructive. When the two of you are on different pages, starting with market data can be a big help towards finding common ground.
Though the startup belongs to you as the founder, always remember that venture capitalists have a lot of knowledge and resources at their disposal. You should value their opinions.
Draw on their experience and eagerness to help, and develop trust between you. By putting a lot of time and effort into cultivating the dynamic with your venture capitalist, your business will be better off. If you dedicate yourself to building a successful founder-VC relationship, chances are your company will find success as well.