MARKETING

5 Guidelines for Founders When Choosing a VC Partner

It is well known that VCs seek out founders who are strong and capable of leading their companies to success. However, what should founders consider when choosing a VC? Here are several suggestions shaped by Founders to consider if you have the luxury of choice. A company's path can often be significantly influenced by an investor (or investors)

Here are five guidelines for founders who are in the process of selecting a VC partner.

1: Choose the partner, not the firm

Be sure to consider the firm and the partner who is leading the investment. How long have they worked at the firm? What motivates them personally? Where does their expertise lie? A younger partner might need to establish himself at the firm. It can be advantageous since they have a smaller portfolio and can devote more time to your startup. Due to the stake they have in your success, they may champion you more than a more experienced partner who has a track record of more successful investments. Evaluate the level of commitment and influence the partner has within the venture firm. The last thing you want is a partner to join your board and lead an investment, but leave a year later for another firm. Board seats belong to the firm, not individuals. It's possible you won't be viewed as a top priority at that firm if that individual leaves. To ensure long-term support for your company, ensure you have at least one other partner in your corner. Ask your potential VC up front: Who will take over as our partner/champion in the event they leave?

2: Ensure operational alignment

In the current stage of your company, you want investors with skills and experience that align with your startup's goals. Ideally, you want a partner who has expertise in your specific stage. When seeking to expand strategically, but more investment is not essential, it makes sense to look for a partner with experience helping companies scale and build strategic partnerships. A young company may be seeking an investor who can assist in getting off the ground, laying the initial wiring, and strategizing for future funding rounds.

​​3: Ask other founders for references

Investors should be able to provide references from the founders they have worked with in the past. Obtain detailed examples of how that investor benefited the startup. Contact at least one or two founders who can explain how the investor added value. This category includes strategic guidance, operational advice, recruiting, helping with funding rounds, and introducing potential business partners. In addition, founders should ask VCs for a reference from a company that was not funded. As VCs, how they handled the founders during the whole process reveals a lot about their character and about the respect -or lack thereof - they have for those in the daily grind of building companies.

4: Make sure you have the same expectations around outcomes

Some founders are only interested in making massive amounts of money and will settle for nothing less than a grand slam. There are other founders—usually first timers—who may not admit it, but could be happy with a 1x or 2x exit if the market conditions or original assumptions change; and others who know a smaller exit will provide some financial security and set them up for the next venture. Both of these objectives are valid, and they require investors who are aligned with founders from the beginning of the process. Because there will always be forks in the road, and you don't want a VC who insists on turning right when you want to turn left. Imagine getting a $200 million buyout just a few years into your startup journey and making everyone money. Would this be an acceptable exit? There is no right or wrong answer. However, you need a VC who shares your expectations from the start. 

5: Watch how the VC does technical diligence, and whether they respect YOUR time

When an investor outsources technical due diligence, that can be a red flag. Investors don't necessarily know your space inside out, but they should still ask intelligent questions that get to the heart of what you're trying to achieve. It is quite common for investors to ask founders to run a technical-diligence check with a third-party expert, such as someone in academia or a former or current investment portfolio member. It will depend on each situation, and if you are pitching a very specific innovation that is crucial to the entire company, that may be subject to diligence. It may be beneficial to step back and understand what the investor wants to verify with the diligence process.  When investors and founders are truly aligned, it can be a beautiful thing and the odds of a successful outcome are greatly amplified, since the founders don't have to worry about any additional distractions. Alignment allows a founder to focus on managing the business and will help drive growth, since less time is spent managing investors.