The relationship between investors and founders can be tricky to navigate. At the best of times, it’s symbiotic, leading to gains for both sides. At others it can degenerate into a test of wills, or worse. How can you forge mutually beneficial, productive relationships with VCs that make best use of your respective strengths and effectively utilize your time?
Try taking these steps to set the stage:
Aim to build relationships rather than complete transactions — Don’t wait until you need funding to approach VCs. Lay the groundwork for a productive and mutually beneficial relationship by looking for opportunities to connect with VCs in informal settings. Start networking now, raise your profile by attending industry events, offer your expertise where you can, and reach out to VCs for informal advice. Be curious. When the time comes for funding, you’ll already be a known quantity.
Set Selection Criteria — Well before you start actively looking for funding, you need to decide what you are looking for from an investor. Are you interested in financial support only? Then focus your partner search on firms that are known for being hands off with their investments. Do you want a hands on investor who could provide help with key business decisions as well as introductions to potential talent? Look for firms and investors who enjoy acting as counselors and sounding boards to founders, who have operational expertise and maybe even a business or two under their belts.
Do Your Homework — Once you’ve determined your selection criteria, you need to assess the lay of the land and figure out which firms and investors would be good fits. There’s no point in pulling out all the stops to meet with investors who aren’t interested in your industry or product segment. Consider investors’ stage, industry and product expertise, reputation, and track record. Then target the ones who invest in the segment your business occupies. And don’t forget that chemistry is important too! As in any relationship, shared interests, similar communication styles, and personal fit matter in terms of how you gel.
Bring Your “A Game” — Don’t give away opportunities by being arrogant, uninformed, or ill prepared. Don’t waste potential investors’ time by not having a carefully thought out and written business plan, with clear assumptions, a solid financial model, and discrete short-term milestones. And don’t assume the meetings are all about you. Make your value proposition absolutely clear. Make sure you have done basic research on the firms and people you’re meeting with. You don’t have to know every deal they’ve ever funded, but you should know their track records, the types and size of deals they’ve done, and the backgrounds of the key players.
Be Open and Honest — If you’ve followed all the above steps, you will have identified a highly qualified pool of potential investors who should be open to hearing your pitch. Of course they are looking to make the best return on their funds. Be candid with them about where you are, your milestones, and what hurdles you need to scale to get to the next level. Spending time building confidence now might mean the difference between getting the benefit of the doubt and additional funding when the time comes, or witnessing a rush to the exits when the inevitable bumps present themselves.
Do you have advice to share on building strong relationships with VCs? Tell us in the comments section below or contact Early Growth Financial Services for help with financial forecasting and reducing your cash burn.
David Ehrenberg is the founder and CEO of Early Growth Financial Services, an outsourced financial services firm that provides small to mid-sized companies with day-to-day accounting, strategic finance, CFO, tax, and valuation services and support. He’s a financial expert and startup mentor, whose passion is helping businesses focus on what they do best. Follow David @EarlyGrowthFS.