This article was originally published on April 28, 2020 in Technical.ly Baltimore.
In the spring of 2013, I cofounded a data analytics company. I had graduated from a Johns Hopkins masters’ program the previous spring, taken the summer off, and got hired in the fall to help spin up programming at a nonprofit. Three months in, two friends and I left and started off on a journey together to do something that we knew nothing about.
The six years that I was part of building that early-stage company — turning an idea into something that customers paid for, uniting a team even when things were impossibly hard, and working together to create something from nothing — was the most rewarding and challenging experience of my life to date.
Seven years later, that story continues. One of us leads on as the CEO, one of us continues a career in tech marketing and music, and one of us — me — has joined an early-stage venture capital fund called Squadra Ventures.
Working with founders, entrepreneurs, and startup management teams over the last three months, it has become clearer that there are key moments in a company’s life where if they had access to some information that people in the know take for granted, they could make better decisions, and possibly alter their trajectory. One of those key moments is when they’re seeking investment.
The points that follow are not secrets and they’re not particularly novel. But, no one told us. So I assume no one has told you.
These are the things that I have learned in my first 90 days as a VC that every startup founder should know about investors:
1. Investors back plans, not companies.
About 90% of the time, founders go into pitch meetings with a misguided approach. They get out their deck and spend 80% of their time walking through the slides and talking about all the great things that they have done so far — their credentials, awards, the tech, and current customers with great titles. Then they spend the last 15 minutes of the meeting talking about their roadmap, highlighting their “use of funds” and close with a statement on being the right team and their impressive line-up of advisors.
You should reverse this ratio.
The accepted perception is that you have to pitch on who you are and what you’ve done, you have to justify yourself, you have to prove that you are the one to do something. That you have to validate your past.
The right team is the one that puts the time in to make a plan for how they are going to accomplish their goals. They don’t only think about when things go well, or when things go bad, they think about when things get weird. They’ve run the scenarios, and they know that they are raising funds not to just keep going, but to optimize their success in executing their plan.
Great investors aren’t rolling the dice on the market, or the valuation, or the team. They are investing in your plan. They are investing in the future. If an investor sets a 60 to 90 minute meeting, they are ready to go deeper. Don’t walk them through your stock deck; they’ve read it. Give a 10 minute overview of the company, then spend 80% of your time going through your action plan for the next 18 months, with a clear definition of how you are going to run the business, drive the product to market, and where you need help and support to level-up.
Spend the other 20% getting to know each other. The relationship matters.
2. Investors want to be helpful.
You would never go into a sales meeting without having done your research. You know who is in the room, you’ve stalked their LinkedIn’s and know who’s been in what role and where they were before, you have an opinion on who the decision maker is and if you’re really good you’ve figured out a way you’ll be able to connect on a personal level. You didn’t have to go far to find this information, but you did have to put in the time.
But in many cases, I’ve found that entrepreneurs haven’t done that homework. You may have to have 100 meetings to get to the one or two that result in funding. Some entrepreneurs think that those 98 others were a waste of time. But what if from each of those other 98 meetings you did your research and got one piece of real help?
Have an ask. Ask for feedback on a specific point or guidance on something that each person in the room cares about and knows about. Ask for an intro to that super relevant person you know they are connected to on LinkedIn that you’ve been wanting to meet. Ask for feedback on the marketing approach you’re using. Investors want to be helpful, they can’t always do that with dollars. Doing the work upfront, means you can still benefit from their network and resources.
Not only does this directly benefit you, but it also demonstrates to investors three absolutely critical entrepreneurial skills — you take initiative, seize opportunity, and know how to sell.
3. Investors expect you to do your due diligence, too.
Meeting with investors is more like interviewing for a job than you think. An investor is trying to see if you and your company are the right fit for their portfolio. It’s not just about if your business is a good business, but will your business benefit from their approach, network, resources, and support model. And just like interviewing for a job, you should be evaluating if the investor is going to be the right fit for how you plan to grow your company and what you want to focus on over the next 18–24 months.
To figure this out, you should ask an investor the following things:
- “When was your most recent investment?” — If this was within the last six months, keep going! If they haven’t written a check in over a year, they are likely not actively investing right now and you should shift the conversation to trying to understand how they could be helpful outside of capital.
- “Why did you invest?” — Expect them to get excited! Hopefully, they’ll talk about the relationship that they have with the entrepreneur, their passion for the space, or how they have been providing support to the company’s growth. This way you’ll get an understanding for what motivates them to invest.
- “How is the company doing?” — It doesn’t matter if the answer to this is good or bad, it’s just important that they are honest and that they know. If they don’t know, because they haven’t talked to the team in a while or they say something vague, they probably aren’t going to be there when you really need their advice and support.
- “What is a recent thing that you have done to add value to one of your companies?” — Take the opportunity to see how personal the investor is willing to get. The answer can range from providing advice in a recent board meeting, hopping on a late night call to talk about a challenging situation, or a connection to a significant resource or prospect. You’re looking for them to tell you a story about how they interact with their entrepreneurs to add value.
- “What is your take on follow-on funding?” — There will be lots of answers to this. Whatever the answer is, it will give you an understanding of not only how supportive the investor is to their entrepreneurs when things aren’t going great, but how active and involved they intend to be for the duration of a company’s journey.
Investors expect you to do your diligence, too. Have this conversation early and make the diligence process a two-way conversation.
4. Investors will be able to tell your good revenue from your bad revenue.
There is such a thing as good revenue and bad revenue. Good revenue is aligned with your mission. Bad revenue is money you take to have something in the bank. Good revenue builds out core features of your product. Bad revenue forces you to build one-off features to fulfill a contract. Good revenue comes from target market customers and enables you to convert their competitors and peers next quarter. Bad revenue comes from clients that you don’t want to put on your logo slide. Good revenue excites your team and brings them together to get things done on budget, on time, and at higher quality than you promised. Bad revenue gets ignored by your development team and deprioritized constantly resulting in delay after delay after delay.
Good revenue focuses. Bad revenue distracts.
Every startup takes bad revenue to get by at some point. That point may be taking a consulting gig that lets you and your cofounder transition to full-time but not work on the business. That point may be taking on services work because a customer just loves your team so much and isn’t able to integrate your product themselves. That point may be taking a contract just to get a logo, even when it has nothing to do with your mission.
It’s the ratio of bad revenue to good revenue, and how that ratio transitions over time, that counts. That’s what an investor wants to know, and they want you to start the relationship from a place of trust. So if you’re taking bad revenue say it. Don’t hide it. It’s much more obvious than you have led yourself to believe.
5. Investors want you to be who you really are.
This of all things, is what I wish the most I had known before. As you probably don’t know, after six years at the company I cofounded, I left and took a year of what I called personal sabbatical.
What it really was an admission that in the last two years I was on the team I had become deeply unhappy. The work no longer fulfilled me. Something that I had been all-in on — customers that I had obsessed over, a product that I had made sacrifices to see succeed, and a team that I had invested so much of my emotions and time into to see grow and become fulfilled themselves — had left me completely broken and burned out.
I realized over the last year that I did this to myself, and it was exhausting. It wasn’t sabbatical, it was recovery mode.
I realize now that founders face a choice. They stay who they really are and put it all out there: raw, unfiltered, truthful, determined, focused, in love with their work. Or, they give in to the prevailing startup culture that says you have be this way to get funding, you have to look like this to be taken seriously, you have to say this to get customers, you have to be who other people need you to be.
At the time, I chose the latter. It worked for the company. It didn’t work for me.
Now on the other side of the table, I see more clearly than ever that founders who are to investors who they really are find the right match. They get into the right relationship that puts them on the path with the best chances to become great. No one can get to great if they aren’t true to themselves, and no one builds the team around them that they need to be successful if they can’t be who they really are.
It’s a choice you get to make every day. And every day you get to rechoose.
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