I had dinner with a founder from our portfolio tonight. He’s a few years younger (actually 2 years older haha – learned about this later) but probably far cleverer than me. The dinner turned out to be a very educating/inspiring insights exchange session. The conversation is about how to set up the right company culture, how to build/develop sustainable relationships between VC investors and founders, and how investors can add value to companies in their early stages.
Taking some notes from the conversation to remind myself for what I still need to learn.
Q: What value would you like your investors to contribute?
I wish the investors can just leave me alone. If they really want to contribute, then just introduce customers, good hires, and good investors for future rounds.
There are firms that provide free consulting services. But I don’t really find much value from that – they learned about my business in a couple of days and came back to me with some high-lever advices in 10 days. How could I rely on their recommendations?
Q: What’s your experience of raising the last round?
I talked to 50+ investors/VC firms. They differ a lot. The best experience was from Andreessen. Despite that they ended up not investing in that round, they showed full respect to me. They told me why they were not going to invest in this round and “but if you can reach this this that metrics, we will join your next round”.
However, some other VCs just ghosted us, and some asked for a lot of documents (which took me a lot of time to prepare) but did not give us a solid reason about why they passed.
To sum up, respect is one of the most important things or the first thing that founders want to get from investors.
Q: What else?
Some VCs are just intellectually lazy – they didn’t do their job to research, ghosted you for a long time, and then showed up with a big check when they heard there’s a strong lead. They won’t build their brand by doing so.
On the other side, Andreessen and some other firms did a great job even if they didn’t invest in our company in the end. They gave us a very good experience – being honest about what they can do and what they cannot do, being transparent about why they don’t invest, being honest about what they don’t understand – which made me to respect them and spread the word for them among the founder community.
Remember, there might be hundreds of thousands of founders in this country, but there is only a small group of top founders (e.g. founders who can bring companies to later stages). Founders exchange info quickly, and therefore a bad reputation also goes around very quickly.
Q: What’s the way for VCs to show respect?
If you are not going to invest, just be honest and transparent. It’s fine to hear “No” since we got rejected 95% of the time. But it’s awkward if you don’t give a solid reason and keep it vague because you want to save the opportunity to join the future rounds in case the business succeeds.
When you are giving reasons, just be transparent and honest. If you don’t know the space, it’s totally fine to say that out – “we decided to not invest in your company because we don’t know the space well”. It’s totally fine to not know everything well. Instead, it helps you to build your reputation if you are being honest – founders will consider you to be smart if you are open to admit that you don’t know something, while people will think you are stupid if you pretend to know something.
Q: What if your board members disagree with you?
I will build a board with people that I trust. I will think about how they will treat me during the worst times. Right now the board is only me and R from X capital, and we also have two industry experts as board observers.
Q: How has R helped you?
He helped us a lot by trusting us. He never asked for those ridiculous spreadsheets when writing us a check – because both of us understand model is just a model, and things will change dramatically as the business evolves. They put money into our firm before the market got hot, and they waived their pro-rata right as they didn’t want us to get further diluted. They trusted us and led our last round when the market was down and everyone didn’t want to lead.
Another investor of our company did the same thing: they gave us the check when we had an MVP that sucked. They told us “hey, your product sucks, but we trust you would fix it and get it right”. However, most of the time, we would hear from the other investors that “we love your product, but we couldn’t invest because of this, this, this.”
Again, trusting people and investing in people is really critical for early-stage investors. R did this well, and their firm has a reputation of doing so – I believe that’s just the gene/foundation of their firm & their success.
Takeaways:
Be yourself (to learn in the next 6-12 months): it’s your own brand that makes a difference in the end in the investing world. Regardless of your firm’s culture and ways of doing things, you should do the right thing all the time: never ghost from founders, never give fake/vague reasons for passing a deal, be honest and transparent to founders, and they will love you and bring deals to you.
Contribute (to learn in the next 6-12 months): founders need help, while there are not that many ways that investors can contribute as founders don’t want investors interfere the business. However, there are still ways for investors to create value: BD intros, talent intros, investor intros, even dirty work such as finding customer list and data. Just spend your time with the founder and see what they really need.
Invest in people (to learn in the next 1-3 years): numbers can be wrong, and spreadsheet is no more than a tool to make some rough estimate. On one hand, it’s a very critical skill that will take you a long time to build – how to evaluate people. On the other hand, this is a culture that a firm should establish: give people (from associates to principals) the freedom (trust) to trust people (founders). Without setting up a trusting culture from the top, the associates/principals at the firm will always try to back their investment recommendations by numbers – which just look “correct”.
Build the right culture (to do in the next 3-6 years): culture matters a lot – if you don’t like the culture/team, you will hate yourself when working everyday. What culture do you want to build if you’re going to build a business? Definitely a Silicon Valley culture where people can freely speak, have no fear to share different opinions and say NO to the management (no BS or ass-kissing), be transparent to each other, and want to collaborate.