Navigating VC Relationships
Choosing the Right Investor
Choosing a VC firm or other investor is arguably the most critical decision an entrepreneur will make in the early stages of forming their company. When you’re meeting with an investor for the first time, they’re clearly evaluating you and your idea — but you should also be evaluating them as a potential long-term partner.
"The difference between a VC and a marriage is that if you’re married you can get divorced. Investors are there forever. "
Remember, you’re in it together for the long haul. Steve Kokinos, CEO of Algorand, notes, “The difference between a VC and a marriage is that if you’re married you can get divorced. Investors are there forever.” You will be working with your VC on a very regular basis, so it is important that there is mutual trust and respect, and personal chemistry. (listen to audio)
Helen Adeosun, CEO of CareAcademy observes that a lot can go wrong when you don’t pause to take the time to really get to know and reference-check a potential investor. In her experience, “Some of the most turbulent VC relationships are when a founder only considers the capital and not who is providing the capital.” (listen to audio)
Aside from personal rapport, pragmatically, each VC fund and individual investor will bring different strengths and past experiences to the table. You’ll save yourself time and energy if you head into your fundraising process with specific goals in mind. Look for an investor who shares your vision and is equipped with both time and resources you need, to providing the specific value-add — e.g. network, experience, talent, advice — you’re optimizing for with this round.
Reference checks on potential investors are also essential. It’s always a good idea to ask investors to connect you with founders, but keep in mind that they may be inclined to connect you with success stories. Do your own research, talk to other founders who have worked closely with that VC, seek out founders who navigated turmoil or whose companies didn’t have happy endings; find out how the investor you’re talking to behaved in those situations. Make sure to gather multiple data points, providing a complete picture of the person with whom you’re considering partnering.
Tip: Be sure to do your research and talk to a few off-list references.
Questions you might want to ask include:
- How frequently and how did you connect?
- Was the investor accessible and responsive to you?
- What’s the best way to communicate with this investor?
- Did they provide helpful introductions, resources or other support?
- If there were times that your company struggled, how did they react?
- What should I know to have a successful working relationship with his person?
- What else should I know?
So, you chose an investor. Now what?
Mutual Code of Conduct
Pillar Partner, Russ Wilcox, notes that before diving into the ins and outs of your VC relationship, the first thing that should be agreed upon is a mutual code of conduct between founder and VC. These basic principles will guide you as you set expectations and build a working relationship with your VC.
You owe each other your highest personal integrity. Each must commit to make decisions by putting the company’s needs first, ahead of personal interests.
Treat each other with dignity at all times. Attack the problem, not each other. Debate behaviors and positions, not character or motivation. Praise in public, criticize in private.
You are character references for each other, so play as a team.
Post-investment, the VC-Founder relationship may take many forms that are unique to the situation and individuals involved. However, there are a few baseline expectations that you can have for how your VC should act, and they will have expectations for you as well. One very basic expectation that you can have is that your VC will be diligent in their work. This includes reading carefully over materials you send, respecting your time by arriving promptly to meetings, and making conscious efforts to add value to your company.
What your VC is going to expect from you is primarily information about the business. They need to know that you are sharing this regularly, holding yourself accountable appropriately, and there is full integrity and trust that bad news will be shared as promptly as good news. Your VC will expect regular, accurate updates on financial and operating results. At Pillar, this generally takes the form of 1:1 conversation every 1-2 months and a brief quarterly investor letter.
Your VC should be someone who you can go to for candid, objective feedback about all aspects of your business. However, on your part, you should be as transparent as possible with your VC. Yvonne Hao, former COO of PillPack and one of our firm’s co-founders notes, “Hiding or sugarcoating bad news from investors has created many more issues than being open and honest. Human nature is such that people don’t like surprises, especially negative surprises, so being upfront with bad news will both prevent that surprise and also hopefully that person will be able to offer you help.” (listen to audio)
In terms of exactly how to share bad news, Helen Adeosun describes a framework that has worked for her in the past. When delivering bad news, she not only shares her challenges, but also potential solutions and asks her VC to help think through the options. In the face of a setback, your VC should maintain composure and continue to be a helpful resource. You’re partners in good times — and in bad.