A VC Answers Founders’ Questions on Founder-Investor Relationship Management

The post in which I offered some suggestions about how a first-time founder might make the fundraising process more efficient and less frustrating raised some follow-up questions that were sent to me via email by a handful of founders who read the post over the weekend.

We went back-and-forth over email, but I think it is worth sharing a paraphrased form of those conversations, as well as those I had back in 2014 which inspired the original post to begin with.

For appropriate context, read #NotesOnTactics: Relationship Management Hacks For First-Time Early Stage Tech Startup Founders before you read the rest of this article.

Founders Ask: My knee-jerk reaction is to permanently cut off investors who pass on our seed round. I may not completely cut off investors who pass on our seed round even though they have stated publicly that they are well-aligned with our mission and vision, and invest in our market. However, I do not think I will keep them updated, and I probably will not include them in my next round.

My Answer: The key is to stay focused on the long game, and not to lose sight of how things might change. An investor who passes on your seed round, but could lead your Series A is probably worth the effort to keep updated . . . if there’s mutual interest in doing so. Keeping an investor updated does not give you an obligation to let them into your next round. Founders will always retain the option to select which investors they let into their startup’s next round. That’s a source of power and control founders will always have, if things go well. In this context, I would try to avoid cutting off my nose just to spite my face.

Founders Ask: What of my instincts? What if my instincts say I should stop dealing with this investor?

My Answer: Always listen to your instincts. Our subconscious picks up information that our conscious mind can overlook, or miss entirely for any number of reasons. I am assuming that the parties involved are each acting in good faith; so investors are not taking meetings with founders for some ulterior motive, for example. To that end, I assume that founders would have done some due diligence on an investor before they meet for the first time.

Founders Ask: This does not work for founders who are; women, or under-represented minorities, or LGBTQ . . . or frankly, all of the above. Isn’t early-stage venture investing about investing in the team/founder(s) more so than in the idea/market/traction? If an investor whose primary function is to see the value in a team/founder(s) doesn’t see the value in me, frankly, I don’t think they’re that smart/wise. Why should I want them to ever profit from my endeavors ? We have to disrupt the status quo or nothing will change!

My Answer: I understand that sentiment. I won’t debate with founders who feel that way except to say that feeling that way risks leading them to sub-optimal decisions about how they engage with investors. This is especially true in situations where founders do not have a 360-degree view of the decision-making process as it unfolded. “Shooting the messenger” might be satisfying in the short-run, but is probably strategically unadvantageous in the long-run. If I were a cynical founder I might keep investors who passed in my previous round updated if only for the potential that they could function as a stalking horse in my next round. My comments about this probably do not apply for a fund that is run by one person, or that is run by two people.

Founders Ask: I’m sick and tired of hearing about other founders getting a term sheet signed same-day/same-meeting. If the EXACT same deal; same back story, same circumstances, same company, same traction, were presented….with a team made up of white/Asian men….the outcome is almost ALWAYS different.

My Response: I believe that life is fundamentally unfair, so I personally try not to let issues like this get to me emotionally. That said, I think I understand the frustrations you are expressing. I have faced such frustrations myself at various times in the past – most notably while I was growing up in Ghana and Nigeria. I believe that it is important to separate fact from myth. In the years since our team started investing in early stage startups, I have not seen a single startup get a term sheet “same-day/same-meeting” . . . I would question how committed an investor who commits that quickly is going to be when things get tough or even how engaged they will be in general as time progresses. I also wonder if there’s more of a back-story that is often left out of the breathless reports by the tech press. Hyperbole has a way of distorting reality. I have tracked a few startups for as long as 18 months before I was ready to recommend that we make an investment. It is more common for me to track a startup for between 3 and 6 months while I try to figure things out. I can’t dispute the reports that you allude to, but I would caution that they are the exception rather than the rule. In one extreme example, Tim Westergren pitched investors 347 times before he persuaded Walden Venture Capital to say “yes” at his 348th attempt. The team went without a salary for 2 years. Fundraising is a long, and arduous undertaking . . . for anyone. People who tell any founder the opposite are doing that founder an enormous disservice. That being said, I am not trying to imply that there’s no bias in the system. I just don’t think it’s what a founder of any background should focus on the most, assuming that founder decided to go down this path independently.

Founders Ask: Your suggestion about preparation beforehand seems disjointed from the reality founders encounter . . . Isn’t each investor different? For example; the conversation I had with you vs. Nnamdi Okike vs. Ben Horowitz vs. Hunter Walk vs. Mitch Kapor . . . Sure, there were a few commonalities; maybe 3o percent? But the other 70 percent of each conversation was so unique to each individual’s priorities, each person’s disposition the day we met, the individual personalities, their placement on the autism spectrum, etc. Isn’t that hard to prepare for?

My Response: I agree. It’s hard to prepare to raise capital from external investors. Now imagine if you do not absolutely nail your answers to the 30 percent of questions that are common to all the investors you will meet. Surely, your chances of success do not improve over time if you go in without thorough preparation for those questions. I assume those questions are ones you fully expect will get asked. As such, they are questions whose answers you can rehearse beforehand. Some of the best conversations I have had with founders have occurred when the founder has kept a running list of FAQs that is updated after each meeting with an investor. Over time, the probability that the founder will encounter a completely new question from an investor reduces to a minimum while the chances that the next pitch will lead to “yes” increases to a maximum. I’m hoping that is an appealing way to think about this. A practical advantage of this approach is that it frees you up mentally to focus on doing a great job answering the 70% of questions you did not expect . . . But, again, that proportion should decrease as you keep pitching investors.

Founders Ask: But keeping investors and other people updated takes so much time and effort. Why should I bother with investors who have passed on making an investment?

My Response: Absolutely. Focus on your current investors. My suggestion to use email as a way to keep other people in the loop is meant to cut down on the effort it takes to update people who are not current investors. Send a mass email to everyone who is not an investor in your startup but who you want to keep “in the loop” about your progress, use software to track engagement. Only meet one-on-one when it makes sense to do so. I tried to convey that idea in the article. The idea is to minimize the effort that is expended on keeping anyone who is not a current investor updated.