While venture capitalists vary in style most take a hands-on approach with the startups in which they invest. They place great importance on the “fit” between the firm’s investment team and the startup’s management team.
Like any relationship compatibility is advantageous and when the fit works well startups can gain tremendous value.
Amongst other motivations, investors want to increase their returns so they are drawn to invest in great teams they can assist to materially increase the value of the startup.
In addition to their own capital, investors can support startups with other capital introductions, business development, strategic partnerships, governance and facilitating the exit.
Each venture capital firm has their strengths and an ecology of knowledge and networks that a startup can tap into. While capital is critical, the value of the strategic component of a venture capital investment cannot be underestimated.
The right investor can take a startup to the next level.
Founders should get to know the investor to better understand their strategic value. Some information may be publicly available and it’s worth doing desktop research and speaking to other startups in which they have invested. Of course founders will most likely get the best understanding of the investor by meeting with them multiple times in a range of forums.
Making an investment is a significant commitment and will require conviction from the investment team that can only be developed over time. At Trimantium, we typically meet with the entrepreneurial team 6–12 months prior to investment. This isn’t a strict or deliberate criteria, but rather a natural timeframe. Again, like most relationships, developing a mutual rapport and confidence takes time.
Founders should be prepared for and avoid underestimating the timeframe required to raise capital.
The earlier they can engage with investors, the easier it will be when it comes time to conduct a formal capital raising process. Founders should aim to have multiple touch points with the investor, sharing interesting insights, prior to a formal request for investment.
When meeting founders, investors evaluate the management team’s style and their compatibility with the firm’s investment team. Investors are testing whether the entrepreneurs listen to advice and are open to the investor’s mentorship and support. Investors are also listening for subtle cues in anecdotes from the management team that demonstrate traits and characteristics that resonate with their experience with successful ventures.
Having developed a good understanding of the investor and engaging with them early and regularly founders should already have a sense of their compatibility with the investor.
By actively listening to the investor, founders will demonstrate they are open to advice and also pick up the investor’s subtle cues for what they expect from the startup’s management team.
Once an investor has agreed to invest it’s critical that founders maintain the momentum in the relationship.
As my colleague Angus Parker recently wrote, a lack of attention and lost momentum is the best way to lose investors and their capital.
To ensure their capital is used efficiently, investors will try to comprehensively understand the risks associated with the startup and ensure the appropriate incentives, controls and structures are in place to deliver success.
The due diligence process and amount of work to get an early-stage startup to be investable can be highly rigorous.
Founders who get their documentation completed efficiently and effectively will maintain the momentum in the relationship and in the investment round.
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