Welcome to a BetaKit weekly series designed to help startups and entrepreneurs. Each week, investors Roger Chabra and Katherine Hague tackle the tough questions facing founders today. Have a question you would like answered? Tweet them with the #askaninvestor hashtag, or email them here.
In this week’s edition of Ask an Investor, we enlisted the help of Impression Ventures founder Christian Lassonde and associate Rainey Cornaby to tell us what a founder-friendly VC looks like — and warning signs of investors that might not be a good fit for your company.
Currently, there are many VCs marketing themselves as founder-friendly without supplying much context to the phrase. While the prevalence of this term increases, many have doubts as to whether or not founder-friendly VCs even exist.
On episode 73 of the CanCon podcast, BetaKit editor-in-chief Douglas Soltys said “There are no really founder-friendly VCs. When things are going bad, the money is the deciding factor. It’s all about protecting the value.” We are going to do our best to refute this line of argument and discuss what it means to be a founder-friendly venture capitalist (FFVC). We’ll also detour briefly to discuss the danger of falsely marketed FFVCs, and how they fuel the perception Soltys espouses in the podcast.
If you scour writing related to friends, a distinct trend emerges on what defines a positive friendship. From Shakespeare to A.A. Milne, characteristics such as trust, mutual respect, aligned values, and two-way dialogue are recurring. These features likely already define your best personal relationships and should also define your relationship with a friendly investor.
This characterization of the FFVC might sound idyllic or unrealistic. We’re here to tell you it shouldn’t.
It is important to remember a helpful VC invests first and foremost in you and your team. By investing in you, the right VC is already making a gesture of trust and confidence. An FFVC wants to foster a positive relationship and bring out the best in you in the good times, and help you safely navigate the rocky times. FFVCs do this by coaching and mentoring you as the individual founder and the team as a whole in both scenarios. Much has been written about how lonely it is to be CEO. One of the key roles of an FFVC is to listen and be a shoulder to lean on. As former founders, we’ve needed that shoulder on some occasions.
A true friend is one who stabs you in the front
– Oscar Wilde
Being a real friend doesn’t preclude someone from frontward stabbing, as Oscar Wilde so indelicately puts it. In fact, it is sometimes a requirement of the job. Often we call on our true friends to give us difficult messages so we can grow as individuals. This is also true of the founder-investor relationship.
Improvement in all things requires constructive criticism and a deft blade to deliver it. Difficult-to-digest pieces of advice are best received when we trust someone implicitly.
Building trust in any setting can be difficult, but is established through continual honesty, respect, and work on all sides, even when honest conversations can be uncomfortable. However, hard conversations should be rare, whether from a friend or investor. If you find they are constantly coming, you likely aren’t with a true friend, investor or otherwise.
Often, smart and friendly money in your company will want you to make changes for the sake of improvement. The important distinction is a true FFVC will be clear with you early on, and along the way, about what they are seeking out of the relationship. Strategy changes and overall improvement in your company should be a dialogue, an ongoing collaboration. An FFVC enables this collaboration instead of leveraging their position of power to push you into a corner. They do this because they know you will be more likely to succeed and push yourself if you remain excited and have ownership of the overall process.
The false FFVC
The most dangerous type of investor is one who falsely claims friendship. These investors tell you what you want to hear until it no longer serves their purpose, at which point you might get stabbed in the back, rather than our declared preference for the chest. In our experience, working as a founder and as investors with board seats, we’ve seen this all too often. We’ve experienced occasions where an investor is happy to provide platitudes in person, then as soon as they leave the room they reach out to other investor/shareholders to plan a coup or otherwise co-op the founder’s decisions. The worse of the lot have no shame doing this and think it comes with the job title of VC.
While these false friends might seem friendly for a length of time, especially during the investment process, their lack of open communication ultimately harms founders and leaves them feeling blindsided.
The vast majority of investments decisions are detached from the principles of friendship. They are purely financial decisions, as is the ongoing support the investors provide to the company. That’s okay. In fact, it is and should be the norm. What we are opposed to, are those investors who fly false colours to market their funds. These investors are the reason founders have doubts about the existence of FFVCs.
Mixing money and friendship
At some point in your life, you likely received the advice “don’t mix friends with finances.” Generally speaking, this is wise advice. Obviously, advice that is not so easy to follow when a founder is looking for an FFVC.
Finances will likely be the source of disagreements, though not as often as you might think. A well-structured investment, where everyone’s interests are aligned, can effectively preempt most potential conflicts. This is certainly one of the reasons we focus so much time and energy on structuring our investments at Impression Ventures.
As former founders, all things being equal, we would argue it is better to partner with someone who can be an FFVC to you.
Former founder investors like Impression have a slight edge to being FFVCs. We have experienced, at some point, what a misalignment of interests with investors feels like, so we have a built-in understanding of it. In eloquent terms: it sucks and makes a hard job as founder exponentially more challenging. This knowledge pushes us to go the extra mile to avoid those misaligned interests. Before a dollar is invested, an FFVC makes sure to align the interests of everyone. This helps create fertile ground for a friendship to grow.
Likewise, be on the lookout for investment terms that put your potential investor in a preferential position on economic terms or otherwise, especially if they claim they are founder-friendly.
Even when founders and investors plan perfectly, conflicts will arise. From our team’s experience from both sides of the table, the best strategy to resolution is rooted in principles of friendship. Honesty, respect, and two-way dialogue go a long way in ensuring long-term value for all parties.
On the VC end, we have adopted a set of steps to ensure we treat our founders like friends in resolving a conflict. When they arise, we first make it clear where our interests are, we then give advice setting aside our interests and then lastly tell the founder the advice we would provide if we were solely considering our interests. We follow these steps to empower the founder with as much information as possible. This practice builds mutual trust over time, strengthening founder-VC relationships and facilitating collaboration.
Being an FFVC is non-binary
Up until this point, we have been writing like there are two types of VCs, FFVCs and everyone else. This distinction has been useful for clarity but is not a completely accurate representation. Being an FFVC is not an inherent quality. Whether or not an investor will be an FFVC to you is not entirely correlated with a past display of FFVC qualities to other entrepreneurs.
Just like in other relationships between individuals, different investors and entrepreneurs have different compatibilities. This differing compatibility can stem from their communication styles, the value they impart on one another, and their expectations and goals for the company. Even the friendliest VC will not be a good match with every founder if their values and methods are not aligned. Friendships take work to foster. Founders must also make a concerted effort to develop this type of relationship if it’s something they want.
In exploring the concept of friendship with investors, it becomes clear that one’s past is less important than the core mutual relationship. With this in mind, a VC having experience as a former founder doesn’t guarantee you’ll be friends and even a ruthless investor can be founder-friendly – likely to a ruthless founder.
Do you need an FFVC?
We’ve established that FFVCs do exist, and the FFVC relationship requires willing participants with work from both parties. Thus we’ve also established that it is not a given that a friendly investor will end up being founder-friendly.
“Friendship is unnecessary, like philosophy, like art. It has no survival value; rather it is one of those things which give value to survival.”
― C.S. Lewis
As former founders, all things being equal, we would argue it is better to partner with someone who can be an FFVC to you. So how much effort should you expend finding an FFVC? First, ask yourself, are you willing to put the work in to build a relationship? If you are, look for an investor who shares your values and goals. Discuss these in your meetings with them. Be clear about what you want to accomplish and how. Go beyond the surface in these discussions and see if you could befriend the person across the table.
Lastly, do your homework. Ask portfolio CEOs what their experience has been. Take a variety of responses as a good sign. After all, no two relationships are exactly alike. Recall what you are looking for: the key ingredients of friendship. Trust, honesty, loyalty and of course, the ability to just listen.
We wish all the founders good luck in finding their FFVC!
Got a question for the investors? Email them here.