Finding an investor for your startup is hard, and as I partly covered in my last post: What Tier is your Investor (or what to look for in an investor)? It involves taking a lot of meetings and dealing with a lot of rejections while at the same time ascertaining how much value-add the investor you are speaking with will provide, above and beyond their investment.
Last month, I had the pleasure of judging my local VCIC event at the London Business School and it reminded me of the importance of the symbiotic relationship between investors and founders. The Venture Capital Investment Competition (VCIC) is a competition for MBA students aspiring to become VC’s after graduation or trying to better understand the investment process for when they start their own companies. The competition is about how well they analyse a business opportunity and then recommend and close an investment with the founder of that opportunity. It’s a great experience. Probably one of the best experiences to get a business student a feeling for how the entire academic body of knowledge comes together into evaluating and investing in a company. If you are currently doing your MBA, you HAVE to do this if you really want to exercise what you’re learning across all of your classes.
More than 8 years have passed since my personal VCIC experience as a participant, but I still remember it vividly to this day. Since then, I’ve had the pleasure of judging it every year thereafter and seeing many MBA teams go through the process and trying any number of things, ranging from the silly, to the creative in their attempts to out-do their competing ‘VC Firms’ to secure an investment-agreement with one of the presenting founders (which, btw, are always real-live companies). Every time I judge this event, I’m reminded of how important it is for founders to not only find the right investors, but also for investors courting a founder to demonstrate their value (their ‘tier’ so to speak).
During my judging of these events over the years, I’ve noticed there are six key areas that differentiate the best VCIC teams (read: VC firms) from the worst (both from the point of view of the founder and the judging VCs). These are:
* The best VCIC teams build rapport with the founders & ask the key questions – Sometimes as an investor you have to ask difficult and probing questions. Some are questions that signal your doubt on a current company strategy or perhaps on how the company’s thinking revolves around any operational area. As the VCIC teams ask questions to get these answers and better understand the founding team’s thinking, they need to do so while at the same time respecting the founders and not making them feel like they, just because they have money, know it all, for no one does, no matter what their experience. I consistently saw VCIC teams failing in this area, but a few that really stood out made an effort in asking questions not from a position of patronising the founders, but from trying to understand them and dig into the right issues.
* The best VCIC teams understand the opportunity & dig only into the right issues with their time– Doing your homework is an important part of any mutual discussion. Some VCIC competitors haven’t even looked at the product that the company makes. The VCIC teams that fared better were the ones that, logically, didn’t get hung up on semantic arguments, but rather dug deep into any number of issues that are important. As a founder, you know what are your biggest challenges. If an investor identifies those as well, particularly without you spoonfeeding them on it, that’s a good thing and bodes well for having them on your board. As an investor, don’t show up unprepared and pretend like you can make up for it by picking up a trivial argument. In the competition itself, sometimes you have to dedicate your time to researching a specific company at the risk of showing up unprepared to interview the companies that you are not interested in for investment. This counts against you, so keep that in mind. In real life, as a VC, its as if you took a coffee meeting with a founder, and then were rude to them.
* The best VCIC teams demonstrate value to the founder – One of the things that VCIC teams have to do when they are asking questions of the startups, is explain who they are. In the context of the VCIC they can fictionalise their ‘fund expertise’ since none of them are running real funds, but part of this exercise is also marketing the right attributes vis-a-vis what the startup team needs. For VCIC teams where a resident expert exists it can be useful, but also consider that you can showcase value by bringing in the right people external to your fund to help the company along.
* The best VCIC teams demonstrate an understanding of the financial requirements of the company – Some VCIC teams fall short of true analysis and research here, they just take whats given to them. Sometimes they underfund companies and sometimes they over-fund the companies as part of getting their numbers to work. There is probably more to say on this point than can fit into this post, but what I’d recommend is that the VCIC teams explore proxy companies in the market and truly understand the impact of offering too little (or too much) to the company. One point on VCIC valuations: Teams, DCFs don’t work well on companies that don’t have historic data!
* The best VCIC teams don’t overcomplicate their termsheets – First of all, if you are a VCIC competitor, you should familiarize yourself with actual termsheets, and word of advice: keep it simple. Check out the Series Seed docs for the USA and the Seedsummit Docs for the EU as a starting point. Secondly, as a VCIC participant (and real investor) keep in mind that term sheets can actually signal quite a bit to the founder of what you think of them and that this does have an emotional impact on the founders. Do they have too many control provisions, for example, or are the economics of the deal indicating some concern? While supervision isn’t necessarily bad, as a founder, the smart thing to do is ask what the investor’s expectation is engaging with founders post investment. Are they meddlesome, for example? Are those control provisions there to protect you or are they draconian in how they operate? Ask to speak to the CEOs of other portfolio companies of theirs. Regarding the economics of a deal, perhaps the economics imply that they think you are overpriced. Ask them to walk you through how they came to that value and why. As a VCIC team, be mindful that overly complicated termsheets can come back and haunt you by providing perhaps too many mixed messages to the founders. As a founder, push back on items that don’t make sense.
If you are a team about to participate in the upcoming finals, I wish you the best of luck. If you are a founder, keep the above points in mind when you are doing a review of your investors-to-be. As for me, I look forward to continuing to be part of the VCIC experience in the future, I always learn a ton and am continuously impressed what teams achieve in such a short amount of time. I find that every time that I judge it, I’m reminded of the delicate interplay between investors and founders and how trust needs to be built over time.