Since I came back to Malaysia, I have had the privilege to speak to many different people in the entrepreneurship ecosystem. Startup founders, startup employees, incubator/accelerator CEO, aspiring entrepreneurs, investors, and anyone who cared to discuss with me about venture funding in the SEA startup scene. I learnt a great deal about the ecosystem by listening to these narratives and experiences. However, when I contrast this to my VC experience in London, there is a common theme that kept coming up. VC only provides capital, everything else that came from them are generally bad. These are the examples of what I have been hearing:
“I only want VC money, not them messing around with my business”
“VC is this evil overlord that will wake me up in the middle of the night and ask me about my growth metrics when I finally found a night where I can sleep”
“VCs are just so arrogant; they think they have it all because they have the money.”
While these opinions may have been true to some extent, the VC industry is also undergoing a mindset shift due to a more competitive landscape in deal sourcing. (It’s a 50-year-old industry ready to be disrupted, ironically). To be fair, VCs have a legitimate reason to be paranoid, because they placed their bet on founders and they have fiduciary duties to their Limited Partners who have set aside a pool of capital for 5 to 10 years. VCs have their metrics to hit as well. They are in for the long term. The best VCs will live by the motto of DBDB –Don’t be a douchebag– because their access to superb deals, like Box, Facebook and AirBnB are tied to how well they maintain their reputation in the industry. They understand their success is dependent on how well their portfolio companies are doing.
I like to think that both parties want the mutually favourable outcomes from every closed deal. So here are my two cents:
As much as VCs conduct due diligence on founders, founders also need to conduct DD on interested VCs. These are five questions that founders should consider when they are deciding if they should take the money from the VCs:
- Do they have the relevant operational and team building experience to advise you on dos and don’ts in running a startup? A great VC will be able to provide relevant ‘been there done that’ experience when you are facing a sales bottleneck or recruitment problem. A great VC can help you to stay focused and prioritise on the important tasks. A great VC has the extensive Rolodex (well, today it’s probably CRM) to connect you to the right person when you need professional services such as admin, legal and accounting services. For example, run by partners with extensive past operating experience, Initialized Capital tried to leverage on their past experience to help early stage portfolio companies to prioritise and stay focused.
- Do they have the relevant scaling experience (or necessary network) to help you grow your business when you need to scale to another market? For example, when I was working at Illuminate Financial previously, one of our US-based portfolio companies took us onboard because they wanted to expand to the Europe. After the deal was closed, their employee #1 came to London and work in our office, to expand their market until they are mature enough to start their own London office.
- What is their stance on follow-on funding? How much help will they give to help you raise a subsequent larger round with their connectivity with the downstream VC? Upfront Venture has a database of downstream VC that was built by their latest partner, Kevin Zhang, as outlined by Mark Suster in one of his latest Medium posts. How wide is their network within the VC industry, and are they able to introduce you to other investors that will help you close a larger round? This is something founders/investors often overlook. Who have they co-invested with? Do they have the capacity to help you plan for the next round of fundraising, for example in organising fundraising event and refining investor decks?
- Do they have the relevant sales network to help you sell your business or strike partnerships with key players in the space? This is probably the cheapest but most valuable asset a VC can offer to their portfolio companies. For example, once you achieve product-market fit, will they be able to introduce you to bigger potential clients or form relationship with potential channel partners? For example, a B2B FinTech solutions for the financial institutions would benefit from VCs with an extensive network within the financial industry (with notoriously long sales cycle) to help connecting the sales team to the decision maker in the institutions. At Illuminate Financial, I saw firsthand how the partners made numerous high-quality introduction through both their formal and informal industry relationships for our portfolio companies that eventually led to successful sales deals.
- How much ad-hoc support will they give you when you are in trouble? This is a very hard question, but I would also argue it’s one of, if not, the most pivotal question to answer. Founders know that starting up a new venture is an arduous journey and there are millions of ups and downs that you need to deal with. Thus, a healthy support system is very important to keep founders going. When things are not going well, VC-founder relationships are tested. Are they just going to step aside, be passive aggressive and leave you alone? Or, are they going to be a proactive partner that pull all their network/resources together to weather the storm? Try speaking to founders of an unsuccessful portfolio company and ask them about the situation when things went south. The way the VC handles such a situation tells almost everything about them as a partner. Fred Wilson beautifully summarises the essence of this in one of his famous “When Things Don’t Work Out” blog post: “When everything goes well, you really don’t need that much from a VC. Of course, I have added value in all of my winners. But it’s the ones that don’t work that I have left my blood, sweat, and tears on. And that’s the paradox of being a VC that cares. Which is the only kind of VC you want to work with.”
This should not be a checklist for founders, rather it is a suggestive framework to approach potential investments. Founders should evaluate which aspects are more relevant to the stage of their business and prioritise those when looking for a partnering VC. For example, team-building skills are more relevant in the earlier stage, but scaling experience is more relevant at a later stage.
The best VCs are like partners/consultants. They are there to help you out when you need a hand. They actively guide founders to better understand their business and formulate solutions together when necessary. They trust founders’ business decision as much as they trust their investment decision. Achieving founder-VC fit is going to give you, as a founder, the competitive advantage you need to gain an edge and grow your business in the long run.