Investors are a ‘pain-in-the-ass’ if founders do not pay enough attention to how they interact with each other after an investment has been made. Preparing for a Series A investment is exhilarating. Often, quite a lot of money has already been raised in the ‘family-friends-and-fools’ rounds, but most Business Angels (BAs), family and friends make investments based on their gut instinct and with an astonishing level of cluelessness.
However, it becomes a different matter altogether when preparing for a Series A once venture capitalists (VCs) get on board. How much does it cost to attract a client? What exactly will a client bring in? What are the revenue drivers? How will you be able to grow much faster? At that point, most companies have ‘hygiene factor reports’ made up. They presume that they can answer the above-mentioned questions, but it turns out that they don’t have any deep-dive business reports. Grilling the company helps the founder(s) and management team to move forward. Challenging questions force them to sharpen their ideas. They get inside information and benchmark metrics. The VCs consequently provide added value and this means that most founder teams are insufficiently astute in properly negotiating collaboration after the investment.
Grill the investor the same way that they grill you
Once investors are involved in your business, they tend to stay in it. Avoid any irritations by asking the right questions upfront. Check if you have the same values and work ethic. Draw up a questionnaire with questions that are important to you where ‘smart money’ is concerned. What do you really need? Has an investor mentioned that they can arrange access to a lot of e-commerce platforms? Ask for a list of those e-commerce platforms. What introductions will they make, when and on what terms? How have they handled other investments that were in crisis? They may grill you but you should grill them back. Watch your timing, don’t get into this too early, get them on board first, but do not forget about it.
Managing Excel saviors
These VCs should turn out to be Excel saviors after the investment. Anyone who fails to meet the agreed budgets and targets will have to deal with VCs who look into every detail with you. It turns out that investors don’t just automatically trust your entrepreneurship and management skills. Not even if you are already building a highly successful unicorn. Not even when they say beforehand that they will only invest in companies where they have 100 percent confidence in the skills of the founder team. Always make sure that in the post-investment planning and budget you include someone who can deliver good reports and analyses to the investors and the MT. Get the whole MT to start loving the numbers. This shows that there is discipline, that you have insight and are taking the right courses of action.
This is how you work together
Define clearly how you are going to work together. Lessons learned from practical experience mean that you have to think about the oddest details so you won’t go completely crazy. For example, how do you keep each other informed? How will the governance side of things be structured? Who sits at what table and who has decision-making authority over what? Negotiate in advance for a say in appointments to the board. Sometimes you have to deal with a conflict of interest or people you don’t trust. Does the VC still need to do someone a favor or give an old colleague a spot? Before you know it, they will be doing just that at your company. A good relationship calls for clear agreements.
A bit of a luxury problem, but raising money you don’t really need, at a valuation that is insanely high, will turn out to be a fairy tale that often ends in a nightmare. Beware of being caught in this kind of valuation trap. A VC is patient and now it’s up to you to pressure the teams to live up to the expectations. The more ridiculous the valuation, the less leeway you will have. “In retrospect, most founders in this situation say, “We never should have taken that last round.” Or they realize in hindsight that the ramping-up of the valuation should have taken place at a more sedate pace from the outset. Take time out from the daily hustle and bustle to check your feelings: Do you really want this for yourself and your team?
In the aquarium
Entrepreneurs and often the immediate MT surrounding them are like fish that have been swimming in the ocean and who are relocating to an aquarium. Make sure you manage that aquarium well in advance. Obviously, the VC will tell you that you really will be staying in the ocean, but we all know better.
Don’t be naive.
About this column:
In a weekly column, alternately written by Wendy van Ierschot, Bert Overlack, Eveline van Zeeland, Eugene Franken, Jan Wouters,Helen Kardan, Katleen Gabriels, Mary Fiers and Hans Helsloot, Innovation Origins tries to find out what the future will look like. These columnists, occasionally supplemented with guest bloggers, are all working in their own way on solutions for the problems of our time. So tomorrow will be good. Here are all the previous articles.