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Recently, an entrepreneur I’ve been mentoring emailed me for advice. She had met a team of “angels” at a startup conference. And a week later, those investors emailed her with an “opportunity” to help her fund-raise a small seed round in return for 15 percent equity and a cash fee. The arrangement struck me as odd so I asked my in-house venture capitalist, who doubles as my husband, what he thought.
Without missing a beat, he responded, “Walk away.” I also asked a friend who is a prolific and widely respected angel investor his thoughts. The response was similar. When I emailed all this to the entrepreneur, she said she was relieved that her gut feeling had been validated. "It seemed weird because they don’t even know me or my company," she wrote. "It was like they wanted to get married on a first date!”
That comment has been ringing in my head all week. Working with investors is like getting married! Consider this: The average U.S. venture investment takes more than eight years to reach an exit; the average U.S. marriage lasts eight years, too! Working with good investors will likely bring a startup more than just financial lift: Founders will have access to mentors and industry leaders, a shoulder to cry on and a compatriot who will be there when things get tough.
So, yep, signing a term sheet with an investor is a lot like getting hitched.
Maybe a good way to think about vetting would-be investors in your business is to extend the metaphor and think about the process like dating. Although I personally haven’t dated in over 20 years (having happily invested in the same guy for over 20 years!) I do remember those initial meetups and how difficult it could be wondering what to expect, what to say and how to get out of the date when things turned sour.
First meeting questions
Based on that experience, then, here’s a list of questions entrepreneurs might use on a "first date" with an investor, to get the conversation rolling. Funny enough, they are not unlike the questions I asked my husband on our first date.
- Tell me about yourself: where you are from, where you went to school, what do you like about where you live?
- What inspired you to start working with startups and how did you get started in this field? What do you like about working with entrepreneurs?
- What kinds of companies do you enjoy investing in? Tell me about some of your more exciting investments.
- Now that I’ve shared our deck, what are your initial thoughts about our company?
Note that these questions have a personal flavor. That’s OK! Too many founders think of investors as bank accounts instead of human beings. But great investors understand the human dynamics, the personal challenges entrepreneurs face when building growth companies; and they want to be a part of the journey with you. Getting to know one another as people first, venture colleagues second, helps both of you gauge your desire to move forward or not.
If you and your team decide you’d like to request a second meeting, and the investor has the same interest, your second meeting will likely get into the details of your startup. A second meeting is also a good opportunity to ask questions you’d like answered about the investment team’s portfolio approach, how they foresee adding value to your company and how they typically communicate with startups.
Convey your openness to taking advice but also stand your ground about the values you feel steadfast on. After a second meeting everyone should have a pretty clear sense of one another’s personalities and values, long-term vision and agreed-on outcomes.
Second meeting questions
After getting a "human" feel for the investor, it’s time to delve more deeply into business issues by employing specific questions:
- What are your thoughts about our company’s potential growth? What challenges do you think we will face? How might you help us overcome these challenges? How have you helped others startups overcome similar challenges?
- What role do you usually take as an investor? Do you plan to be hands-on or just call in occasionally? What would you expect from us in terms of communication frequency, content and norms?
- What changes would you want to make in our team if you invested? How would you suggest implementing these personnel changes?
The communication boundaries and norms established, ideally, will fit both your team’s culture and the investors’ team culture. Some investors like to work closely with startups, and this may be helpful; otherwise, it could become a nuisance. Other investors can be standoff-ish, and when trouble hits won’t be helpful to you because they don’t know enough about your company or the context.
Most investors envision making changes over time to the company’s team. That may make sense: It’s everyone’s job to grow the company, so its everyone’s duty to curate a high-performing team.
Still, that doesn’t mean you and your investors will agree on how to let go of under-performers. Openly communicating about this from the beginning will establish a shared focus on performance and growth, while allowing swift and thoughtful changes to be made to your team when necessary.
As the title of this article suggests, it may be best to remain unattached — to investors, in any case. Thankfully, most startups don’t need venture capital to grow. Moreover, a bank loan, a small investment from a family member or a go at growing the startup through sales allows founders to retain full ownership and avoid the extra work of managing investors.
So, think about what’s right for you. Whether you decide to raise financing from investors or not, start with end in mind and remember that your "true love" should always be your customers!
January 24, 2019 at 11:45AM