Welcome to a BetaKit weekly series designed to help startups and entrepreneurs. Each week, investors Roger Chabra and Katherine Homuth tackle the tough questions facing founders today. Have a question you would like answered? Tweet them with the #askaninvestor hashtag, or email them here.
This week, we answer a question clarifying the role of a venture capitalist. Just like the role of a founder morphs, the role of a VC changes throughout the life of a startup. Getting a product to market fit is a very different situation than selling a company to a strategic acquirer, and requires very different opinions, strategies and capabilities. However, there are some generalities that you can expect from your friendly neighbourhood VC. As you go about making the important decision of which VC firm you want to partner with, keep the “5 C’s” below in mind. You’ll get the most out of VCs who are all five of the below.
First and foremost, your VC needs to provide funding for your business. Their primary job is to provide the fuel (cash) for your engine (company). Yes, yes, this is obvious, but I find that people lose sight of this important function sometimes. Value add things like helping with hiring, customer and partner intros, strategic insights, and connections to potential acquirers are all important. Over my years as an investor, however, I’ve yet to meet a great entrepreneur who doesn’t prize the funding from a VC above a lot of these other value add factors. Breaking it down to basics, VCs provide money for your company. Don’t lose sight of that.
Find yourself a VC who has it in their nature to spread love about you and your company.
With the exception of some smaller seed fund investors, your VC should have enough money to capitalize your company over at least one more round of financing in the future — and hopefully more. Make sure you understand the funding possibilities and historical patterns of your VC, in both good (e.g. your next round is a nice, healthy, upround) and bad scenarios (e.g. you need a bridge round or can’t find a new investor for your next round).
Even if you understand what money is available to you, remember that money is never unconditional. You’ll have to work hard to meet your agreed upon milestones, and to develop your relationship with your VC so that money is available when, and if, you need it.
The best VCs understand their role in the startup food chain. They are coaches, not players. This means they stay on the sidelines and don’t actually play the game. Problems often arise when investors confuse the two and get too involved in the day-to-day operations of a company. This is a recipe for disaster.
Find yourself a VC who knows where they can add the most value. Someone who has enough experience to be a coach to you and your executive team. To help you see a larger perspective when you are caught up in the never-ending details of building your company. Someone who can connect you with the right people who have had similar experiences to help you make important decisions. Someone who can introduce you to potential hires that can work alongside you day-to-day to help you build real value in your business.
A mentor of mine explained the role of a VC to me early in my career. “Your role is to be an extra pair of hands for the CEO of the company you invested in.” What he meant by that was, whatever major three or four things a CEO is working on at any one time, that is what you need to dig in and help with.
He further explained to me, however, that being an extra pair of hands doesn’t mean that you always have unconditional support for what a CEO is seeking to do with their business and the actions they are taking within the business. You have to maintain a balanced view on what is right for the business, and sometimes that means being a critic of the CEO.
Being a good critic is all about how you deliver feedback. VCs will certainly give their own opinions and suggestions on given topics directly, but the best ones will allow CEOs to arrive at their own decisions. This can be achieved primarily by putting a CEO in touch with people who have faced similar issues or had similar experiences. That way a CEO can get insight from the people who have been there and done that, contextualize the feedback to their own situation, and come to an appropriate decision.
Being a critic is okay, and, in fact, the best entrepreneurs I know expect it and want feedback to better themselves and their companies. Being a jerk, however, is not okay. Repeatedly being a critic of a CEO directly is bad investor behaviour, regardless of the company’s situation. Find yourself a VC who is a critic, but not a jerk.
You want your VC to be a trusted advisor — find one that you feel comfortable sharing your biggest successes and problems with.
Building upon the “extra pair of hands for a CEO” concept, the best VCs also act as concierges. They are always available and on call to help with important issues whether those are business-related or personal. When I was a VC, I always strove to be the first call that a CEO would make if they needed advice, whether that was good news or bad news. You want your VC to be a trusted advisor — find one that you feel comfortable sharing your biggest successes and problems with.
Finally, you should expect your VC to be an energetic cheerleader for your business.
Now that I am back on the operating side, I am aware of the importance of this role more than ever. It’s hard enough building a company, and, unfortunately, critics of entrepreneurs and startups abound everywhere. You need your VC to be constantly out in the market saying good things about your company. You need them “bigging you up” to other investors. You need them writing about you in their blogs and speaking about you during their panel talks and in the media.
The best VCs do this innately. It is why they are in the VC game in the first place. They are deal junkies and are passionate about entrepreneurs and disruptive visions. Find yourself a VC who has it in their nature to spread love about you and your company.
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