The role of a founding CEO in a startup searching for a business model is radically different than a CEO building and growing a company. Some VC’s get it, others may not. So if you’re the founder of a startup, you may want to consider who you take money from.
Is Your VC Founder Friendly?
How do you figure out which VC firm is best for you? Here are five questions to consider.
- What startup stage do they typically invest in?
- Do they “get” Customer Development?
- Who do they have as advisors?
- How many of their founders are still with their company?
- Will they tailor your vesting to your contribution as a founder?
What Startup Stage Do they Invest In?
Ask potential investors which stage they invest in.
Certain VC’s like the new class of Super-Angels and small VC funds specialize in the early stage of a startup where you are searching for a business model. And some larger funds that specialize in later stage deals may have a partner or two who likes to invest at this stage. (Some VC’s invest solely on technology breakthroughs and assume they’ll find a market later.)
Early stage investors have different insights then those investing in a later stage. They understand that now’s not the time to hire a senior VP of Sales to start to scale the sales force or to look for a finance department to create income statements that say zero each month. These VC’s are skilled in helping you search for the business model.
If they haven’t done many early deals before a business model is found, ask them why they are interested in you? Is it for your technology? Your potential business model?
Do They Get Customer Development?
For a founder there’s nothing worse than searching for a business model day after day and then sitting in a board meeting with a VC who asks about some detail of year 5 of your revenue plan.
Ask potential investors, how will they measure progress for the company and you as a CEO? Do they have metrics and a methodology they use for early stage companies that differs from companies that have already found a business model? Have they heard about Customer Development? Lean Startups? Can they tell you what you should be doing in Customer Discovery and Customer Validation? If not, do they have a better methodology?
Who Do They Hang With?
Investors who have successful ex-founders who you can call for advice, grab a coffee with or get on your advisory board is a good sign. (And a sign that their ex-founders still like them.)
VC’s who have ex-CEO’s who took over from the founder and built the startup into a multi- $100 million company can give great advice about your growing company’s infrastructure, but if you are still searching for your first customer, they may not be much help. (In fact, unless they’ve been founders themselves they usually provide bad advice.) VC’s with formerly high-ranking government officials and Fortune 1000 CEO’s as advisors may be wonderful to help you grow your company in a later stage but not helpful now. (Unfortunately the odds of you being the CEO at this future stage are pretty low.)
How many of their founders are still with their company?
Most early stage VC’s are betting on the founders to both deliver the product and to find the business model. At this stage, firing the founder is not a strategy, it’s an act of desperation.
By the time the company gets to the build-stage (the Transition) what differentiates VC’s is how many turn the founders into builders versus relying on bringing in new, more experienced management to lead the transition. As a founder, you should ask: What percentage of the firm’s companies still have founders as the CEOs? In any active role? If the number is less than 25%, you may want to think twice. Ask to talk to some of the founders who are no longer with their startups. I’ll bet you get some interesting stories.
Will The VC Tailor Your Vesting to Your Contribution?
Most founders don’t make it past the build stage in a startup. Almost invariably the new CEO will comes in and complain about how disorganized the place is and then does a wonderful job in putting policies and procedures in place. Yet none of this would be possible if the founder hadn’t created the company in the first place. Typical vesting of your stock is over a four-year period, yet the founder’s contribution is heavily weighted to the first few years.
Over the years I’ve become a bigger and bigger believer in some sort of accelerated vesting for the founders tied to finding the business model. There have been suggestions of a different class of stock for founders here and good general advice in VentureHacks here.
All these suggestions are written as if you had a choice of who to take money from. Most of the time you’ll take whosever check will cash. But if you do have a choice, asking these questions will keep you from being surprised in a board meeting.
- What phase of the company lifecycle are you?
- What phase do your VC’s typically invest in?
- What type of advisors does your VC have?
- What percentage of this firm’s former founders are still running their companies?
- What metrics are they going to use to measure progress in a board meeting?