Is Your VC Founder Friendly?

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.

  1. What startup stage do they typically invest in?
  2. Do they “get” Customer Development?
  3. Who do they have as advisors?
  4. How many of their founders are still with their company?
  5. 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.

Lessons Learned

  • 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?

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7 Responses

  1. Sounds like good advice. Can you clarify: you say to ask, “What percentage of the firm’s companies still have founders as the CEOs? … If the number is less than 25%, you may want to think twice.”

    At the same time, you mention “the odds of you being the CEO at this future stage are pretty low.”

    If the premise is that early stage CEOs have different skills from those required to scale, then 25% seems high to me. Where does this number come from?

    As the CEO, if you are able to acknowledge this weakness, wouldn’t you want a VC with a good track record of successfully replacing CEOs? (No matter if your ego suffers.)

    • Tristan,
      VC’s and founders don’t always have the same interests.

      To a VC (and the VC’s investors) putting money into a startup and making sure they get the biggest return on their investment is their job. In the end it’s a financial transaction.

      To some founders that’s all starting a company may be as well. Grow the pie as large as possible by getting the heck out of the way and bringing in professional management.

      But to other founders creating something from scratch and then seeing it all the way through to something used by thousands or millions of people is worth more than money.

      There are many founders who would trade a lower price for their company for being able to take the company to the promised land.

      That’s why founders are artists and why accountants don’t run startups.

      steve

  2. Great post. Two comments:

    (1) Do the analysis you suggest at the partner level as well as the firm level. A firms reputation doesn’t necessarily map to an individual partner.

    (2) When doing this assessment, e.g. if you’re considering taking a VC’s money, don’t rely just on public information, which usually has a selection bias toward favorable. Do comprehensive “reverse due diligence”. Find founders of portfolio companies that are no longer with the company (thank you LinkedIN!)…talk to them and get the real story. I wrote more on reverse due diligence here http://www.altgate.com/blog/2007/11/reverse-due-dil.html

  3. Great post, except for one crucial thing. You say, “…if you do have a choice, asking these questions will keep you from being surprised in a board meeting.”

    Baloney! You don’t sit there simpering, “I don’t have anyone else to take money from, so I’m just going to smile and thank you for having the grace to get rich off my hard work”! Your potential investor doesn’t know that s/he is the only game in town, so make them work for it. Tell yourself you have plenty of alternatives (mindset is everything) and make them sell you on themselves. Not only will you know better what you’re getting in to, but it sends signals of strength that will help you in your negotiations.

    Grill them about their firm, their fund, their partners, their investment strategy. It will make you seem more experienced, less desperate, and generally look like a better investment.

  4. I’d take this even farther and say that taking the wrong money can doom you from the beginning. I’ve seen several up-close-and-personal examples of investors pushing an execution model onto a startup — waterfall development, big PR, splashy launch — with wholly predictable results.

    I distinctly remember one such occasion where I was asked for an MRD, five-year product roadmap, and FCS launch plan by a new board member the day after closing. We had talked to precisely zero customers, mind you — we were just technology at that point. Being just a marketing hack I dutifully put it all together, but I instinctively knew that we were in trouble right then and there. To learn how the rest of the story turned out simply read Chapter One of the Four Steps.

  5. [...] wrote about building early stage companies in his book, Four Steps to the Epiphany. This post was originally published on his blog, and it is republished here with [...]

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