Investors spend a great deal of time thinking about where they should invest their money, and carefully vet potential portfolio companies. It's easy for startups to forget that this relationship of selectivity should work both ways, and that not all investors are the same. By accepting money from an investor, you are committing to working closely with that investor for years to come. You are committing to a relationship, as investor and startup expert Jeremy Halpern explains.
In this guest blog post, Jeremy Halpern, Partner and Director of Business Development at Nutter McClennen & Fish LLP, outlines the key things to consider when picking an investor.
To learn more from Jeremy Halpern, apply early to the Boston Founder Institute, where he will be mentoring.
They say taking venture capital is like getting married. That’s true with all of the possibility for amazing success and radical failure that it implies. So how do you avoid staring deeply into a partner’s eyes (that once, maybe not so long ago, held so much affection and promise) and seeing disappointment? Or worse, seeing the desire for you to move out? Well, like any good relationship, it all begins with a few critical things: Passion, Leverage, Dating and a good Lawyer.
Passion
When looking at a sea (okay, maybe a pond) of potential investors, you definitely want to start with the ones who are as passionate about your venture as you are. Early stage investors should show you some love on your first date. If they don’t get you, you shouldn’t want them. Just like dating, you can’t logic your way into someone’s heart. While you can definitely act in ways to eliminate the passion, there is very little you can do to convince someone who is “just not that into you.” So find a date with an investor who cares about your sector, or who loves your customers, or who loves your technology, or who at least loves you. If you don’t share the passion, it will be hard to weather the storms that are likely to come.
Leverage
Let’s face it – everyone would rather be chased by prospective suitors than to have to do all of the chasing. If you have identifiable customers with significant business pain, a killer solution, a fantastic value proposition, a proven business model, a large and growing market, a defensible competitive advantage and are led by an experienced team, then you WILL have investors coming to you. The stronger your venture, the more you can select marquee VC firms and have better opportunity to keep valuations high, and draconian performance milestones low. You will be able to resist deal terms that may leave you vulnerable to firing, or which may be painful to your Angels who backed you from the get-go. In Seinfeld-language, who’s got more “Hand” will tell you a lot about how your potential relationship is likely to play out. So just like before dating, get a haircut, buy some nice clothes, think about your profile, and above all, create a valuable business that is in high demand - because being one of the pretty ventures definitely has its advantages.
Dating
You should definitely date. Even if you are very young startup – go date. If you are desperate and marry your first investor suitor, you won’t know much about your new partner – and you won’t know how they compare to other possible investor mates. If you wait too long until you are in financial distress, you will wind up in the disempowering world of the arranged marriage (also known as the recapitalization) – not something likely to turn out well.
So, date! Find out if your potential investors have good reputations around town. Ask around – just like you would of your friends about prospective life partners, fellow entrepreneurs, lawyers and angels will have useful information about the reputation of your potential venture mate. Do they support their investments? Are they financially strong? Are they in fact smart money providing you leverage and reach into your customers or strategic partners? Will they step up for follow on investments? Do they work with and help grow Founders, or do they have a pattern of bouncing the founders at the first opportunity? Do they value the risks taken by your Angels? Does your venture fit into their long term portfolio strategy or are you just the soup-de-jour? By spending time comparing possible mates, you ensure that you understand how your partner will likely act when the inevitable hard times arise. Because they will.
Lawyers
Okay, so without an excess of cynicism, I hope you will agree that things do in fact go wrong. Didn’t you ever look back and think: “but s/he seemed like such a good fit at the time – they were passionate, had a good reputation and offered a great partnership.” And because you didn’t want to scare off this once oh-so-desirable partner, the mantras were “trust me” and “we’ll work out the details later.” And then, of course, things went wrong. In fact, in business, things ALWAYS go wrong – it’s a question of how often and how bad. Like the old military parable, no business plan ever survived contact with the marketplace! So unlike in love, your lawyers are not just useful – they are a necessity. Because there is a thin line between love and corporate warfare.
Lawyers will help you understand the deal, the risks, possible solutions (the Solomonic opportunity of splitting the baby), and your obligations to your team, angels, customers, lenders etc. By the time you actually enter into the partnership you should be crystal clear on issues such as voting control, employment termination scenarios, dilution, board seats, performance milestones, strategy, compensation and when and how the company will be sold.
So while many will tell you that marriage to a VC or angle investor is a terrible thing – I think just the opposite. The relationship can be an amazing matching of capital, skills and knowledge with your venture’s opportunity, passion and team. Make sure that you spend the time and gain the leverage to find the funding partner that is right for your venture and that you flush out the details of the relationship. Because in the land of venture capital, there is no annulment.
To learn more from Jeremy Halpern, apply early to the Boston Founder Institute, where he will be mentoring.
