How to Make the Most of Your Investor Relationships
When my partners and I received an investment in Face.com, we also received two great board members: Yariv Gilat and Arkady Volozh, the CEO of Yandex. Our work with them was fruitful and they taught us a lot.
Many entrepreneurs I meet have the misconception that investors come in and take over their companies, causing the founders to cede control. However, the reality is usually very different. In fact, company founders and management are much more informed about the company’s day-to-day operations and consequently possess significantly more control than they might otherwise believe (the Principal-Agent Problem, if you are interested).
But success often starts with a strong relationship between founders and investors.
You, the founder, are starting a long-term, committed relationship with your investors and that requires cultivation and nurturing. The four symptoms below should be warning signs that something is wrong with that relationship:
- An investor calls complaining that they are out of the loop. Usually, that’s a sign that you think your investor does not provide you with sufficient value.
- When you wait for board meetings to discuss status updates. This is a recipe for failure: first, your investors are likely to be surprised by the board presentation and second, the investor will be less dependable for help.
- Your investor is too active in making superfluous introductions or getting involved in the product development process in a way that places additional overhead on you.
- Your investor raises hell the first time the proverbial “shit hits the fan.” This can even happen at the first board meeting after the investment, if you miss projections or you just don’t get along well.
This relationship dysfunction can lead to disaster for your company during the next funding round because regardless of the VC’s right to invest under the agreements, the investor can decide not to continue investing in your company. When one of your lead investors decides not to invest in your next round, it can undermine all hope for raising money for your startup. In a high-risk and high-stakes industry, much depends on your relationship.
Many of the issues outlined above are a result of information asymmetry. It’s not (I hope) that your investors are looking to nag, monopolize your time or harm your company. It is often because they feel they’re in the dark; you run the company day-to-day and they rely on you for updates. Therefore, the easiest way to stay out of a downward relationship spiral with your investors is to open a consistent proactive communication channel and to clearly define early on what information exchange is expected of both parties.
So, how can you empower your investors to be more helpful as well as ensure they feel up-to-speed and engaged?
- Expose KPIs (all the time!). The hardest part about exposing KPIs is defining the right ones, right now. For example, for a consumer product, there are numerous possibilities for the “right” KPIs, including: # of users that joined last week, % retention, average acquisition costs and average lifetime value per user, etc. For an enterprise sales company, your metrics might be: average deal value, duration of POC, % of close, sales per rep, etc. My humble suggestion: agree on the right ones for your company, pick them with your investor and share these regularly in a tabular format that includes the past weeks’ results along with your thoughts about any changes and whether you are changing anything as a result.
- Tell them what you need (and what you don’t). Every month, I ask my portfolio companies what they want my top three goals to be for that company. What should I be working on? Hiring help? Intellectual property research? Monetization input? This way I know what’s expected of me and you know I won’t bombard you with things you don’t need. Even more powerful: sharing a list of what you evaluated and don’t feel should be a focus for the company until a given date can filter a lot of noise.
- Don’t wait for board meetings to meet and consult. Executing day-to-day is demanding. Invstors understand this. However, it is worth everyone’s time to find the 10-15 minutes to call every so often and ask what’s up or to tell your investor the latest good, bad and ugly update. You’d be surprised – sometimes just checking in with a good sounding board helps make all the difference in your lonely life as CEO.
- Forward focus. When in board meetings, don’t present to your board by spending more than 20% of the time reviewing the past. Pick a strategic issue you are seeking feedback on and focus on that. I suggest the following great resources for managing your board meetings: How we run board meetings at Seeking Alpha and The Secret to Making Board Meetings Suck Less.
- Be direct. Don’t be optimistic or “manage expectations.” Tell it like it is. Treat these relationships as real partnerships. You should expose the good and the bad quickly so you can put your thinking caps on to work through issues together. Here’s what you don’t want to happen: you give your investors a very positive outlook (remember, this is what they update their partners with!) only to realize that you’re running out of cash in a couple of weeks (true story). Ben Horowitz had a great post about this: CEOs Should Tell It Like It Is.
Taking an investment means getting into a long-term, committed relationship. Part of what you’re taking on is the permission (and responsibility) to ask for help—because no one makes it alone. Always make sure one of your investors is the kind of person you can call at 3am if you just need someone to chat with when you’re at your lowest. Startups are hard! You can’t always be best friends with your investors, but it’s a long ride so invest in the relationship. You might as well do the work with people you like and get along with.
Eden Shochat is equal partner at Aleph, a venture capital fund focused on partnering with Israeli startups poised to scale into global markets and disrupt industries. He was previously co-founder of Face.com and Aternity, as well as a partner at Genesis. He also helped start The Junction, a leading Tel Aviv-based startup incubator. For more of his thoughts and those of his team at Aleph, visit Image licensed under Creative Commons.