Your reaction to title of this blog post well be “Waaaaht is he talking about?!” Most
first-time founders with no experience with investors assume that if anything the investors may be trying to manage them. In fact I’ve met many who frankly live in fear of a VC deciding to replace them as CEO. And this was done quite a bit by VC firms back in the last century. I highly recommend reading Steve Blank’s latest post, entitled When Founders Go Too Far to understand the history of VC investments and how things have changed this century. It’s on his web site as well as on the Harvard Business Review web site.
What do I mean by managing your investors? First of all whether they be angels or VCs virtually no investors are totally passive. Angel investors may be investing in your venture because they have a personal interest in the market you are working in. VCs are increasingly seeing their roles are more than financial managers and starting to mentor their founders. So when I talk about managing your investors I mean not simply assuming that once the check clears the bank you really can forget about the investor and go back to working on your product. Cause your work is done right? No, your involvement with investors as CEO is just beginning once you take an outside investment. If your investors are also going to be on your board of directors I recommend you read my post Boards of Directors.
One of my personal tropes is that 90% of problems can be traced to poor communications. Whatever the real number is I doubt anyone will argue that communications is very important. So here are some tips:
- Communicate often. The best scenario is to set up a regular schedule of communicating with your investor. There are three levels of communications: face-to-face, online synchronous, and asynchronous. These are in descending order of bandwidth. However, as everyone knows, trying to set up f2f meetings with anyone, let alone busy angels or VCs, can be very difficult. So I would recommend you ask your investors how often they would like a f2f. And if they don’t have a firm answer recommend once a month. Why once a month? Because that is the typical schedule for Board of Directors meetings. Online meetings can be a bit easier to schedule, since they don’t require travel but they aren’t a true substitute for f2f. They are a good fallback though. But you can’t rely on a once a month communications. In between f2f meetings you can use an asynchronous channel like email or Slack. Some startups even email out a monthly newsletter to investors, advisors and other interested parties. The value of email or better a tool like Slack is that they leave you a history or audit trail of communications between your investor and you. I don’t recommend text messaging or chat, it’s too terse a medium to deal with the complexity of a startup.
- Communicate early. There are two very important rules with investors. One, is no surprises. The other is don’t hide bad news. So for example, let’s say you promised your investors and others that you will have an alpha launch of your product on a certain date, but you can tell that the developers are running behind and either you will miss that date or if you make it, the alpha will be subpar. First make a decision to either stick to the date or cut back on the product (leave out a feature, for example) to make the date. Then as soon as you have made the decision let your investor know. While they won’t like hearing bad news they will respect you for informing them. The worst thing you can do is to have an investor find out bad news on their own, such as the fact your CTO has quit to join Google.
- Don’t get investors involved in operational details of your company. Keep your investors focused on high level issues: your business strategy, milestones, and how they can help you. Don’t take up their time on operational issues such as what payroll system you should choose or that you have to fire your junior programmer. They are busy people and don’t want their time taken up with details of your company’s operations.
Setting the investor to work
Good investors bring more than money to the table. They can act as mentors, providing advice, guidance and feedback. Just keep in mind that unlike independent mentors, your investors have an agenda. Read my post Everybody’s Money is Green! for more on this subject. But here are some specific ways you can get your investor to help your venture succeed:
- Recruiting. Hiring is mission critical in any growth venture. Investors usually have large networks. So let them know what position you need to fill, what the qualifications are and what the compensation is. They may give you feedback on all three items, but remember, the final decision is yours and you don’t want to get investors involved in operational issues. And if you can help your investor fill a position in another of their portfolio companies that will win you a lot of points.
- Interviewing. Many investors have run companies themselves and probably have interviewed dozens or even hundreds of candidates, as I have. As a new founder you may have little or no experience in this area. So for senior level positions,
C-suite positions, like CTO or VP of Sales, ask your investor if they would be willing to interview finalists. Don’t send them anyone at a lower level than finalists, as it’s not a good use of their time. And don’t give them a veto vote. Their vote should be heavily weighed, but not decisive.
- Introductions and connections. As I’ve written elsewhere two things CEOs and founders need to do while they run their companies are: one) learn and two) build their personal networks. Investors have large networks. If you need an introduction to a potential channel partner, for example, it’s perfectly acceptable to ask your investor if they know someone there. Of you might want an intro to the CTO of one of their portfolio companies to discuss a particular technical challenge you are facing. Just remember to keep these requests for intros and connections at a high level and do not ask to frequently. People guard their personal networks closely. As one investor said to me when I asked for an intro, “Sorry I can’t help you, I only have so many arrows in my quiver and I can’t use one for you right now.”
- Strategic guidance and feedback. Investors have seen dozens or hundreds of companies and tend to be very familiar with different business models, ways to acquire customers, and other elements of building a successful business. So take advantage of their knowledge and experience. But again, do so sparingly. I suggest leave strategic discussions to your face to face meetings.
- Competitive intelligence. Investors see lots of deals and hear about many more. They actively track founders and new startups. The better they know your company the more successful they can be to giving your early warning of potential competitors. Or even a heads-up on potential partners.
- Deal syndications. Investors are financial managers and a key to their success is managing risks. One way they do this is to syndicate their deals, meaning they bring in another investor to participate in an investment round. This can cut two ways, it can help you by bringing more experience and contacts for you to take advantage of, but it can also mean you have more investors to communicate with and to manage. Understand that you should be able to decline the participation of an investor you are not comfortable with. But if you are comfortable, help your investor manage their risk by syndicating. That new investor could well end up taking the lead in future rounds, so treat them well.
And with that last phrase I’ve probably left the most important part of managing your investors to last, but certainly not least. As I’ve said elsewhere, no one likes to go first, be they investors or customers. So whomever takes that big risk and makes your first investment is a special partner and deserves to be treated well. But any and all investors are taking risks, betting on you, and they deserve honest communications and fair treatment. Once you take an investment your reputation as a founder and CEO will start to build more quickly. Successfully managing your investors will be a big part of that reputation, so give it the time and effort it deserves. Managing investors is a high priority task of CEOs.
Here’s one final tip. A great way to make your investor happy other than building a great company is introducing them to a startup that they end up investing in. So know your investor’s investment strategy and keep your eyes and ears open for a startup seeking funding that meets their criteria. Investing is a competitive game; if you can give your investor an edge by a good intro they won’t forget it.