With Seed-stage venture capital plentiful, choosing and managing investors wisely is more critical than ever
When advising early-stage companies looking to raise venture capital, I almost always get asked questions about picking investors, and at what point they get too hard to manage. While no two companies are the same, if you’re looking to bring on investors, that tells me a lot about your vision—it’s not a lifestyle business you’re creating, it likely requires investment ahead of revenue, and the outcome has the potential to be massive. Based on these assumptions, here’s the advice I give.
First, Make Sure You Get A Deal Done
If it’s your first attempt at building a company with a highly-scalable business model and term sheets are scarce, I usually re-focus the discussion on how having few (or no) investors will likely mean that your company and dream will die on the vine. If you’re serious about seeing this through, the worst thing to do is try to over-optimize and end up with zero investors. Get a deal done and go in knowing that expectations will change; you are now working towards a ‘venture-sized exit.’ If you’re not ready for this, then even one investor is too many!
Investors Are Not the Same As Boards
Usually, when the question of how many investors comes up, the real issue is board composition. Early venture investors usually require a board seat as part of the round (if they don’t, they will be much more passive), and this is a good thing; you want someone who is as helpful as possible, and being on your board is part of their job. That being said, you must make sure there is enough chemistry and know you can count on them during times of opportunity or crisis. If you build a relationship well before the financing and understand how to best work together, this will go much more smoothly. It’s usually obvious who the right partner is during a financing, as they will share more of your vision than anyone else.
Boards are also important in that they have the ability to influence the company and will ultimately decide if you’re doing a good job running the company. Entrepreneurs often ask me how to keep board control; I answer in a couple of ways. Firstly, the board structure, like anything else, is up for negotiation. If you have exactly one interested investor, you probably won’t control what the term sheet looks like. Get a couple of them in the mix, and now there’s give-and-take that can result in a more favorable board structure. Secondly, I believe that it’s healthy to have a board that roughly reflects ownership. In the early days, if ownership is split pretty equally between common shareholders and preferred, then a 1-1-1 or 2-2-1 (common-preferred-independent) board structure is perfectly fine. Of course, the real issue is finding that perfect independent who can take a helpful, objective view of your business. It often helps to find someone who is walking in your shoes running an early-stage company, but has seen a lot more in their career that can help balance the discussion.
Keep these issues in mind, hire investors slowly, and regardless of how big your board is, you’ll find that the right solutions appear at the right times. Sure, there will always be rough patches and inefficiencies, but your company should feel like it’s being pulled in the right overall direction.
Managing Investors and Boards
If you’ve done a good job of attracting investors who share your vision and have spent time building good relationships, then you’ve made a good start in ensuring that even ‘too many investors’ are all contributing positively and making your life easier.
Of course, there are a few things to keep in mind for managing even the most enthusiastic investors.
There should be no surprises for anyone around the table. There should be constant communication and an understanding of what reactions may be to good and bad news. Full transparency is key. New issues should not be discussed for the first time at board meetings.
Picking a focus area of discussion for investors to weigh in on (at least at every board meeting) will keep everyone productive. Make sure everyone knows what is ‘keeping you up at night’—it will get them into problem-solving mode.
Ask for help. Give assignments. If there are overwhelming issues that investors have worked through with other companies, then put them to work; pattern-recognition is a beautiful thing. All investors and board members want to be entrepreneur-friendly and helpful, so they will hustle to build the right reputation.
If you’re building a venture-backed business, then get used to dealing with investors and boards. Find ways to make everyone feel productive and you’ll see that the business will usually be pulled in the right direction. If you’re at the other end of the spectrum and find dysfunction at every turn, then it’s time to switch gears and really evaluate if the people around the table (including yourself) are useful moving forward. Get an early start at setting the right board culture, and you’ll find that there’s no such thing as too many investors. At the end of the day, it’s the company’s growth and execution that solves all problems. Spend most of your brain-power here and you won’t get any major gripes from shareholders.
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Ranjith previously co-founded YouSendIt.com where he led products, raised money and acquired a couple of companies. He plans to do more of the same at PunchTab. Twitter: @ranjithkumaran; LinkedIn: linkedin.com/in/ranjithkumaran.