Some Thoughts on Communicating With Your Investors

Given that small institutional seed rounds are becoming more and more common, I thought I’d share a few of my thoughts on how to best communicate with investors.  After raising this sort of round, it’s usually the first time an entrepreneur has to think about putting some structure of investor updates and communications.  These aren’t set in stone, but some practices that I think make sense and have been effective.

1. Do investor due diligence.  Before thinking about investor communication, I go back to the importance of doing due diligence on your potential investor to understand what their expectations are and what their behavior is typically like.  My partner Dave blogged more about that topic here. The worst thing is to be misaligned after the investment about what you think is appropriate for the company and what your investor might think makes sense. 

2. Establish a board, or a board-like governance structure.  This seems intimidating, but has many benefits.  First, getting investors to commit to board involvement is a great way to make sure your VC is committed to your seed round (that is, if you have a large VC in your round).  Second, if you are planning to raise VC money in the future, it’s helpful to have established the cadence of regular board interactions early, and I think it’s actually good discipline to do this and get regular feedback from your board members.  Plus, it helps you work out the kinks of running a board so it’s not such a shock to the system come the series A. I typically prefer small boards of just 3 people.  Larger ones can work too if everyone collaborates well together.  The nice thing about small boards is that you can also invite your strategic angel investors to come periodically to contribute as well without things getting too unwieldy. Just make sure they do their homework beforehand and can contribute! 

3. Some of our portfolio companies have informal boards.  It’s more of a regular investor “stand up” meeting that is pretty efficient.  But the expectation is that the major investors are present and engaged, and for the most part, this has been true.  Sometimes, our co-investors have sent 2 partners to these meetings, so it’s nice to know that it’s being taken seriously.  Of our 13 portfolio companies, 10 had/have formal boards during the seed stage, and the rest had a more informal structure. 

4. Make investor communications short, but frequent. I like the cadence of a 1-2 hour board meeting every 4-6 weeks. In the meantime, a weekly or bi-weekly update I think is helpful to keep investors caught up (I prefer this in email form because it’s more efficient for everyone).  The goal of this level of communication is not to get the approval from your investors on your performance.  The goal is to make sure that your investors are armed with the information they need to help you.  

5. Pre-wire and focus. The goal of your 2-hour board meeting should be to spend as little time as possible on general updates and non-critical governance issues. Regular business updates should already be absorbed by your investors through your written updates.  What you do want to spend time on is the 1-3 most critical strategic issues that you are facing and need practical help on. I’m an advocate for a quick chat with board members a few days before the meeting to say “ok, you get where the business is right? Can we agree to focus 50%+ of our time on issue A and B?”.  This is a good way to introduce tough conversations too, so that you don’t get an unthoughtful gut reaction, but a constructive discussion about challenging issues like fundraising, missed targets, disfunction in the exec team, etc. 

6. Give assignments and follow up.  I’m always surprised when investors need to ask “how can we help?”.  Remember, we all tell our LP’s that we are immensely helpful to our portfolio companies, so make us follow through on that!  The best way to make sure that investors follow through on what they say they will do is to get them to say what they will do publicly and follow up publicly.  A follow up can be an email that says “as next steps, thanks in advance to investor A helping with X, investor B helping with Y, and thanks to investor C for already doing Z!”. 

I’ll probably blog about more on this topic from time to time.  But for more reading, check out Brad Feld and Steve Blank’s posts on reinventing board meetings.  They have way more experience with the topic than I do. Also, thanks to Rob May at Backupify who helped shape some of my thinking here as well. 

The Illusion of Stability

I was having dinner last night with someone that has been in the financial services industry for the last 8 years.  

He made a comment that I completely agree with. He remarked that many people go in his field (and others like it) thinking that it would be the “safe and stable” option.  But as we’ve seen in the last few years, that is simply not true.

I grew up in a fairly traditional Chinese home.  There was a strong influence in my household to rack up fancy degrees, get nice jobs at brand name firms, and rise the ranks in an environment of “safety”.  I certainly haven’t had the most non-traditional career (unfortunately!) but at almost every step, I faced resistance from my family, who were puzzled about why I was taking a risk in joining companies that were completely unknown to them (and most other people) at the time.

I was talking to the father of my partner Lee the other day, and he also jokingly remarked “I never understood why Lee left a steady job at Paypal to help start LinkedIn.  Why didn’t he just get a safe job like being a stockbroker?”

But if we’ve learned anything in the last several years, it’s that stability is over-rated.  What seems safe today will not be safe forever.  In fact, when everyone thinks something is safe, that’s probably the time when it’s starting to get too risky.  Think about mortgages, municipal bonds, banking, etc. 

For startups and for the ecosystem that I work in, this is actually great news.  I agree with others that say that although working for an individual startup is risky, pursuing a startup career path is not so much.  The great thing about this career is that you are continuously building skills of value, in (hopefully) emerging market segments that will value your experience (win or lose) for a long long time.

So, with more and more excellent talent realizing this and opting out of “safe” and high paying roles in finance, law, etc, we are seeing more great talent flowing into the entrepreneurial world, and building innovative companies.  Sure, that investment banker-turned-product manager may not be the best PM in the world initially.  But the mere fact that she has chosen to embark on an entrepreneurial career path early means that there is a much much higher possibility that she will be a founder or an integral team member of a meaningful new venture that solves important problems and employs hundreds of people.

Maybe that doesn’t sound as stable as working for GE, but it sure sounds like a more meaningful career. 

Some Thoughts on Hiring Technical Co-Founders

I reblogged an awesome post last week about how non-technical founders need to step thinking about “finding” a technical co-founder and “earning” a technical co-founder.

I’ve been thinking about this a lot, and talking to Jason Jacobs at RunKeeper this afternoon, I realized that there is another equally important issue that gets overlooked in this discussion.

Too much time to spent focused on the TECHNICAL and not enough on the CO-FOUNDER

I think when most non-technical entrepreneurs think about finding a technical co-founder, what they are really thinking is that they are looking for a technical “resource”.  Someone who can code really fast, make technical decisions without screwing anything up, and look good enough on a powerpoint.  The non-technical founder isn’t really thinking about finding a peer that that hope to go to battle with day-in-day-out, can challenge them appropriately, will enjoy spending 12 hours a day with for years, etc. 

As I reflected on this, I think that the two issues are really linked.  The business founder thinks they want to have a great technical co-founder, but doesn’t believe that he or she can really “earn” one.  After all, why would a rock star technical founder be willing to join a moderately experienced business guy or gal?  So, the business founder sets their sights lower, but also is really on the hunt for a resource as opposed to a killer technical entrepreneur.

I love the thought of “earning” a technical co-founder because it sets the bar higher for everyone.  The business founder does more work to attract a great technical partner, but also will set their standards higher once they really believe that they have created meaningful value on their own.  The technical founder gets to see what the business founder can contribute and can make the tough decision of who to go into battle with for many years as well.

Is this really all just theory?  I think not. I’ve backed many business founders that have had to earn great technical co-founders, but in each case, they were really looking for a founder and not a resource.  Quick examples: Ariel Diaz and Aaron White at Boundless Learning, David Vivero and Kunal Shah at RentJuice, Jordan Cooper and Doug Petkanics at HyperPublic to name a few.  In each case, the technical co-founder was recruited before funding and with the expectation that the founding team will scale and lead their respective companies for years to come. 

That’s what one would look for in a business founder, so why should it be any different when earning a technical co-founder?

“I could end the deficit in 5 minutes. You just pass a law that says that anytime there is a deficit of more than 3% of GDP all sitting members of congress are ineligible for reelection.”
Warren Buffet (via siminoff)

Is This VC a Good Girlfriend or a Good Wife?

I’ve been using this slightly chauvinistic metaphor a fair bit recently, so please forgive me :)

It’s always interesting to me to watch how entrepreneurs evaluate VC investors.  If you are in the luxurious position to be able to choose your investors, I really recommend going through the extra couple days of work that that would entail.  In a world of highly competitive financings, entrepreneurs are sometimes presented with the “opportunity” to “get a deal done” quickly.  What they don’t realize is that on the VC’s side, they are being encouraged by their partners to “lock it up” quickly, which, when you put it that way, actually doesn’t sound too great at all.

Some investors are what I’d call bad girlfriends but great wives.  They may be hard to get a hold of initially, tough to schedule with, deliberate with their process, ask really blunt and hard questions, etc.  This can be off-putting, and I don’t advocate for this, but I think the entrepreneur should keep in mind that pre-investment behavior is not always indicative of post investment behavior.  I know some investors that are pretty tough on entrepreneurs as they go through the fundraising process, but go to enormous lengths for the entrepreneurs after an investment as been made.  

Conversely, there are other investors that are sweethearts in the dating phase, but not great after the investment.  I’ve seen this myself - some investors are very charming and easy to work with during the fundraising stage, but don’t contribute much after the investment is made.  Entrepreneurs quickly realize that the friendliness of the investor during the partner meeting doesn’t really mean squat when you can’t get him or her to hustle for you. 

Ideally, you want an investor who is both a good girlfriend and a good wife.  Some of the best do behave this way.  But you can always catch a great investor in an “off” period.  Much of VC is about managing your time so that you can be as helpful as possible to the entrepreneurs that you are in business with.  So sometimes that means some annoying encounters early on.  Also, at the seed stage, some investors might do very little due diligence and be very easy to deal with to get a very small check that they view as a option for the future. On the flip side, an investor that takes a seed investment very seriously and will devote their full efforts towards a company will probably be more methodical and rigorous in the evaluation process.  One of these hypothetical investors may be considered a better girlfriend, but who will be the better wife?

All this can be addressed with a little bit of VC due diligence.  Some specific thoughts:

1. Call some of the entrepreneurs that this VC has backed before.  Most VC’s will say “feel free to talk to any of the CEO’s of my portfolio companies”.  Take them up on it.  You don’t need to go overboard - find a cross section of a) CEO’s that seem similar to you or lead a company that is in a similar stage as yours b) The CEO of a company that is not doing so well or where the person was replaced.

2. Use LinkedIN to accomplish #1 if asking directly might be challenging (which may be a negative signal in and of itself).  I find that raving fans love talking about people that they are enthusiastic about, so don’t feel like you are disturbing them of it’s out of place to ask.  Also, no answer is a datapoint (although take it with a grain of salt in case your email bounced or the entrepreneur is crazily busy).  For the sake of all entrepreneurs and investors, only do this is you are very very serious and the VC has indicated very strong interest in investing in your company.  

3. Ask for specifics. “What did they do specifically to add value in x, y, z situations” (when x, y, or z are the most critical areas that you need help).  ”How did this investor behave during your follow on round of financing?”.  If the entrepreneur has a couple investors, ask “what does investor X bring that investor Y did not?”.  

For additional thoughts on this, check out my partner Dave’s blog post on doing due diligence. Also, read the book "Who" that has some great tips on conducting diligence calls. 

Intellectual Honesty vs. Revisionist History

I never had a great appreciation for the temptation to revise history until I became a VC.

We all do it. VC’s say “I knew that was a bad investment” when one of their partners’ companies is struggling.  Or we say “I should never has passed on that deal” when we really never had a chance to invest in that company anyway.

This is really tempting when you are fundraising, either as a VC or an entrepreneur. When I meet an entrepreneur for the first time, I’m completely at a disadvantage. The entrepreneur could have done a hundred crazy things as a founder over the last two years, and I’d have no clue unless I do due diligence or have been tracking her for a while. 

This is even true for companies that I’ve backed.  I was meeting with the founder of one of our portfolio companies, and we were talking through his product roadmap.  There are some very exciting things coming for this company - we were both fired up.  But halfway through, I realized that we were rewriting history a bit. “Hold on a sec” I said “Let’s just be clear - we took a shot on goal earlier and it didn’t quite work out, right?  Can we talk a bit about how that is informing what we are doing now?”

The favorite pitch that I’ve heard in recent months was from an entrepreneur that could have completely revised history with me, but chose not to.  The company he was building was interesting in its own right, but how he got there was ugly, wandering, a bit amateurish, and frustrating.  It made me LOVE this entrepreneur. He told me about how he naively listened to investors and advisors that kept stringing him along and jumping through hoops (literally making him move across the country).  He told me about getting mugged multiple times, having a co-founder disappear into thin air, changing course dramatically, and then grinding it out to a very interesting place.  I loved the honesty, and my esteem for what he had accomplished was greater as a result.

One of the best pieces of advice I ever got was "authenticity works".  It’s true!  The reason I love being a VC is that I get to listen to an entrepreneur’s story, and be part of helping to continue writing it - twists and turns and all.  I hope the founders I meet are willing to be intellectually honest with me.  Seed investing is what we do - we usually finance a company and try to set a budget that allows for multiple shots on goal.  And if it’s time to call it quits or start over completely, I think I’d rather be a part of the new thing than trying to salvage something the entrepreneur isn’t completely fired up about.  Some pretty good companies have come out of these sorts of restarts, but they all start with being intellectually honest about things that didn’t work. 

Rob Go Thanks for visiting my blog! Learn more about me or ask me a question.