When Investor Goodwill Backfires – What It Means to be Founder-Friendly and Founder-Investor Fit

A few Fridays ago, I had the fortune of reconnecting with a founder, backed by some of the most recognizable names in the Valley and exited his business last year to a juggernaut in the data space. Now working on his second startup. And he brought something extremely curious to my attention. “Investors shouldn’t be too founder-friendly.”

I’ve talked to hundreds of founders and seen thousands of pitch decks in my short 4 years in venture capital. Yet, that Friday was the first time I’d ever heard that. And it was too bizarre for me not to double-click on. The fact that the sentence also came out of a founder’s mouth and not an investor’s bewildered me even more.

The Macro

A decade ago, being founder-friendly – in a time of hostile takeovers and CEO replacements – was a differentiator for a VC fund. These days, every single VC fund that I’ve ever come across say they’re founder-first, or founder-friendly, or some cousin of it. Though admittedly, not all practice what they preach, I’ve even heard some VCs call out others saying, “Any VC that has ever replaced a founder is not founder-friendly.”

It’s not a bad thing to be founder-friendly. In fact, until that Friday, I thought it was heavily preferred for a partnership to be founder-friendly.

The Balance

So, when he said “Investors shouldn’t be too founder-friendly.”…

I had to ask. “Why- why do you say that?”

“I wish my investors held me more accountable. I wish my investors course-corrected me a bit more. And, I wanted any one of my investors to pull me off to the side sooner and tell me, ‘You’ve got to get your shit together. These are bad numbers.'” Unfortunately and subsequently, in a matter of months, he was forced to raise a flat round right after.

As a first-time founder, he didn’t know what were good numbers and what were bad numbers. Though there were hiccups here and there, his startup was growing at a steady rate. So, like many others, he thought: “I must be doing alright.” His investors often let him do what he chose to, with little friction, and saying, “We trust your judgment.”

Yet, he, as well as many other founders, had a sample-size of 1. For serial entrepreneurs, maybe 2, maybe 3. On the other hand, VCs have 100s, if not 1000s, in their sample size – deals that worked out, deals that didn’t, startups they could have but didn’t, and ones they’ve turned down. By the law of large numbers, many, especially the top-tier investors, know by muscle memory what the difference between great, good, and bad are. In other words, their sample size tended to represent the entrepreneurial population more than a founder’s sample size.

And I learned in our conversation, being “founder-friendly” isn’t being laissez-faire. But it’s about being a coach, a Yoda for a young Luke Skywalker. At the same time, for founders, you choose to raise venture capital for its “smart money”. Money that comes with advice, network, and resources. Use it. Your investors want you to succeed as much as you do.

Building context

Without advice that’s built on experience from large sample sizes, you, as a founder, have just a single data point. Your own experience from t=0 to t=now. A single dimension of analysis. The biggest reason, after all, of bringing on outside investors isn’t just the capital they bring, but the insights (and resources and network) they have collected across their portfolio, and sometimes from their founding/operating experience as well. A sample size constructed of more than one data point. At the same time, know that you don’t have to follow your investor’s advice 100% of the time.

In his book The Messy Middle, Scott Belsky quotes Hunter Walk of Homebrew saying, “Never follow your investor’s advice and you might fail. Always follow your investor’s advice and you’ll definitely fail.”

As Scott Belsky puts it, it’s akin to “Here’s the numbers I used to win the lottery. […] The best advice doesn’t instruct – it provokes. […] Most best practices are, in fact, just potential practices to consider employing. The more potential paths you have to consider, the better you can triangulate your own approach.”

Founder-investor fit

Let’s take a step back before you and your investors sign your marriage documents. Unlike a marriage, where if it happens to get to its worst, you can file for divorce. As Fred Wilson of Union Square Ventures put it earlier this year, “you can’t fire your investor.”

Here are the parameters you can use to assess founder-investor fit:

• Stage/Fund/check size – Do they invest at your stage? Do they typically write core checks or discovery checks at your stage? Does your championing partner invest at your stage?
• Portfolio (previous investments and competing investments) – Have they previously invested in your space? If so, are they now bullish or bearish about the space? Has their investment thesis changed? Do they have competing portfolio startups?
• Industry/vertical/area of expertise – Related to the former point, can they provide value on top of capital to you? Where do their resources (i.e. supply chain, sales, hiring, downstream investors, operational advice, etc.) lie?
• Partnership
  • Diversity – How diverse is the team? How diverse are the checkwriters? Is there anyone on the partnership that echoes your cultural, racial, eductional, etc. background?
  • Generational transition (as Nikhil Basu Trivedi describes it) – Are there younger investing partners taking the mantle at the firm? How frequently does this happen?
• Brand – Is the fund’s brand something you would be proud/find useful on your profile? Is the firm’s brand aligned with the individual partner’s brand? If so, will partner succession be challenging? Do they produce content you would like to align yourselves with?

While there are many form factors of founder-investor fit, I find Harry Hurst (co-founder of Pipe, investor) and Brianne Kimmel‘s (founder of Worklife Ventures) framework provides another degree of freedom and consideration for founders. They (Harry’s tweet, Brianne’s tweet) recommend looking at the ratio CS:H, or check-size: helpfulness. And how uncorrelated check size and helpfulness are. Big checks don’t always mean that investor will be helpful, especially if the check size is small in comparison to their AUM (assets under management). If it’s small in comparison to their AUM, how much time can the investing team/partner spend on your startup?

For this I go back to: are they writing a core check (typically 2-4% of their fund size)? Or a discovery check (0.1-0.5% of their fund)? It’s not a hard-and-fast rule, but a general rule of thumb that may be useful when accepting term sheets.

The only exceptions to large checks, according to Hurst, are:

1. The check is coming out of their inaugural fund,
2. And/or, if your championing partner is super excited and knowledgeable about what you’re working on.

So, when you’re raising in the early days, but can also be analogized downstream, look for helpfulness among angels, (ex-)operators, and maybe even solo capitalists, who can provide great value. Value, as Kimmel amazingly sums up, is:

1. Access to highly relevant network,
2. Trusted relationships with close candidates,
3. Operating experience aligned to current company needs.

Ask, just ask

Some investors are hands-on. Others are hands-off. Have conversations early with your investor before signing the term sheet. At latest, within a month of it. What do you need from them? What might you need from them in the future? Can you have them on speed dial?

Don’t be afraid to ask. Especially for major decisions in your venture. New executive hires. Product pivots. Equity distribution changes. Unexpected market motions and internal developments, and there’ll be a lot of these.

I’ve met many a founder who find it uncomfortable to ask for help, but when building a company, you don’t have the luxury of dancing with your ego. Don’t leave it up to the investor to assume what you’ll need. And it’s possible that by the time they come to the realization you need help, it might be too late. Address the elephants in the room early on and source diversity of opinion.

As a founder, it’s okay if you don’t know certain things. You need to know your product like the back of your hand. Your market and your team, too. But the nuances in between, you don’t have to. If you chose your investors carefully and purposefully, then trust them to have your back.

In closing

Now I would hate to sound like I knew this all along. ‘Cause the fact is I didn’t. But the discussion after is what inspired this blogpost and my subsequent double take on the topic. At the same time, I hope what I learned will be useful in your own insight development and founding journey.

Cover photo by Annie Spratt on Unsplash

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