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When my brother Jeremy and I argued as kids about which of us got the biggest serving of ice cream for dessert, our mom used to say, “You get what you get, and you don’t get upset.” As new founders, we often fall into the trap of the dreaded debate over ice cream desserts. We start the journey with less personal and reputation capital, less experience and less confidence.
That last point is more damaging than either of the previous two, and as a result it can lead to lower expectations and standards when it comes to the investors we work with. To put it bluntly, we only get half a scoop of rum-raisin ice cream — and who the hell wants rum-raisin?
When entrepreneurs fight to keep a business alive, the best source of funding is often the only source of funding. That said, building a real business takes longer than five years, and building a really big business will probably take ten years or more. The investors you decide to work with will be there in one form or another throughout the journey, so selecting the right partners to work with is just as important as the first few employees you hire. Here are a few things I learned while working with our first group of professional investors.
Related: How to Choose the Right Investors for Your Startup
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Collaborate with investors who have built real businesses before
During the Disco founding process, I spoke with at least 50 new MBAs who were employees or analysts at a major consulting firm before embarking on the adventure. Half of the employees I spoke to during our seed raise suggested turning, and the other half suggested closing the company as “unsolicited advice.”
Now I don’t want to give the impression that all new MBAs with their first careers in a company have no idea what they are talking about, and I am willing to learn from the experiences of absolutely everyone. However, I value the experiences of entrepreneurs who have gone through the process of building a business more than someone who has not.
Entrepreneurs who have become investors understand how quickly market conditions can change. These venture partners can empathize with the challenges of building a team, finding a product-market fit and selling. They sincerely appreciate the progress and process it takes to get there. Our lead investor, Phil Libin – founder of mmhmm, All Turtles and Evernote – was the best example of this and one of our key advocates throughout the process of building our business. Libin is like a rocky road, dynamic with solid variety. Find a Phil Libin.
Choose investors and companies that have supported tangential (but non-competitive) companies in your space
Deep expertise in a category is very helpful, but it can also encourage creativity. Oftentimes, investors who have previously supported or founded companies in your space have biases that are no longer relevant. When we started working on Disco, I approached the CEO of one of the earliest recognition and feedback apps about joining our team as an investor and advisor to the company. His feedback on our app and approach was that he was interested in and believed in the category. However, “it wouldn’t work” as intended, and our approach to our go-to-market was flawed. Again, the feedback and insights are valuable to consider, but we were closer to our customer and the company at the time.
Market conditions change, technological paradigms shift, and in most cases, the first to enter the market is never the company entering the market. If we had taken our first money from this investor I believe we would have spent quite a bit of time and capital validating something we knew was no longer relevant. The beauty of our investment group at General Catalyst was that our investors had less direct experience with employee culture software. However, they knew a lot about the HCM market. They were able to provide high-level strategic guidance on how the pieces fit together, but they trusted us in the trenches to make the right decisions for our business.
Related: The Importance of Recognizing the Right Investor
Observe how investors negotiate
Negotiating term sheets is never fun. Experienced investors who see and do a lot of deals know and understand what the key bottlenecks of a real deal look like. In addition, they don’t go into small details or try to squeeze or adjust terms at the last minute of a negotiation.
If you find yourself working with an investment group trying to “side letter” for better terms or come back after terms and conditions have been established with a different or new proposal, find someone to fill their place. You’ve probably built momentum with a solid core group of investors, and any sloppy or questionable negotiation behavior should not be tolerated. Just imagine what working with this partner will look like when it comes time to evaluate an M&A term sheet. Or what if you’re in trouble and need a small bridge to extend the runway until you’re profitable? Rum raisins.
Find investors at the right stage
As we went through the fundraising process for Disco’s seed funding round, we chose to include two companies that were traditionally better suited to Series A companies. Initially, we thought the best way to work with these companies was because they could paint us a picture of where we wanted to go, a la Series A.
These were reputable companies and great partners to work with – however, there were very different expectations within our investment group as to where Disco should be in terms of our growth. It made our board conversations harder to manage. It made important platform and product decisions challenging and controversial. Trying to extend the scope of a Series A company to your start-up business can be harmful, so try to build an investment group that meets you at the right stage and at the right time.
Related: 6 Ways to Know if an Investor Is Right for Your Business
This one is probably the most important. One story I love is Webflow CEO and co-founder Vlad Magdalin’s “social contract” in which he asked all of his investors to sign. In summary, Magdalin’s social contract obliged Webflow’s investors to prioritize Webflow’s mission and employees over revenue. That is not only exceptional leadership, but also an exceptional qualification of investors.
In contrast, I once had an investor who suggested I skip Thanksgiving with my family to build an outside sales force over the holiday weekend. I will never build or nurture a culture that pushes my employees away from their families, nor will I work with an investor who shares that mindset. That’s in my social contract. Get clarity about your own ‘social contract’ and keep those principles at the heart of building your investment team and advisory board. Talk to other founders who share your values to get their perspective on the companies that might be a good fit for you before making any commitments.
Resist the urge to take the first offer without the proper diligence. Ask about the extra scoop. And for the love of God, don’t take rum raisin.
Janice has been with businesskinda for 5 years, writing copy for client websites, blog posts, EDMs and other mediums to engage readers and encourage action. By collaborating with clients, our SEO manager and the wider businesskinda team, Janice seeks to understand an audience before creating memorable, persuasive copy.