Growing Your Business: Picking the right investment partner is a courtship
Venture investors think and talk a lot about the characteristics of entrepreneurs they look to back. We look at their backgrounds and psychological makeup — What functional roles have they had (general manager, vice president of marketing, chief technology officer)? What size company have they worked with (large corporate, mid-size, start-up)? Has the team worked in a sector that aligns with the current venture? Is the team complete? Are the individuals self-aware? Motivated? Psychologically stable? The team, it is said, matters most — bet on the jockey (the CEO), not the horse (product/market opportunity).
We do a lot of homework to understand our entrepreneurs. Countless hours spent in meetings, asking questions, listening to answers — what you say, what you don’t say and how you say what you do or don’t say. We talk to people who have worked for you and for whom you’ve worked. We ask them about your strengths and weaknesses, looking both to confirm your greatness and to uncover the part of your story you’re not telling us (it’s not that we think you’re a crook, just that we know that so long as you are in selling mode in an effort to convince us to fund you, we’re not likely to get the full story). Since everyone’s got some skeletons (negative traits, behaviors or stories), it’s incumbent upon us to be private investigators, going beyond the work you’ve done and getting under who you are as a person and what you’ll be like to work with, in good times and in bad.
Countless are the Dr. Jekylls who turn into Mr. Hyde — something we often discover only after we’ve invested. (By the way, it’s not that we expect you to be perfect — we know you’re imperfect. We just want to know how your dysfunction will manifest itself when plans are missed, cash is tight and the market isn’t beating a path to your door the way you’d planned.)
Time and energy
Entrepreneurs need to go through the same process, provided that they’ve got attractive enough an opportunity to have choices among prospective investors. To start, you want to ask yourself whether you want an active or a passive investment partner.
Passive may sound attractive (“just give me the money and go away until I’m ready to exit”), but you ought to think hard about what you miss by taking a passive investor. Good active investors will open their Rolodex to help you get customers, employees and partners. A good active partner will bring operational and venture experience that may help you dodge value-diminishing decisions. A good active partner will serve as a strategic sounding board for you. Running a company can feel very solitary even if you have lots of people around you. Having an informed partner there to listen and counsel can help you weather the storms that every fast-growing company goes through.
So what do you look for in a value-added partner? Here are some questions to ask yourself:
• What operational background informs your investors’ experience — what functional roles did they have, what size of company did they work with, what sort of industry/sector experience do they have? A fund is more than just one partner’s background, so look to the full partnership as a potential resource for you and your company.
• Who are the other partners in the fund and what backgrounds and relationships can they offer you? Here’s a dirty little VC secret: It is not that uncommon to see the deal done with one partner, only to see responsibility for that deal handed off at a later stage to another partner or junior staffer — who you may know less well and have less comfort with — at a later date. Find out whether they have such plans or have done this in the past.
• Beyond experience, what sort of individual personality are you dealing with? Venture investors have been known to possess a strong sense of self (e.g. a big ego). If justified by performance, a strong ego need not be a negative. But if the ego is masking insecurity, then you’re likely to have some interesting (i.e. painful) moments. While it’s not easy or straightforward to assess insecurity, developing a strong capacity to judge emotional and social intelligence is a skill that will serve you well in respect of judging your partners and in recruiting your team. (See “On the Lookout for Multiple Intelligence,” Oct. 26-Nov. 8 New Hampshire Business Review for more on this.)
The message here is that the evaluation process is a two-way street. Sure, the VCs have the upper hand in that they have capital and relationships that you may need. But, provided you have choices, it’s critical for you to spend time and energy to pick a partner that you’ll be wedded to for the next five years. A longer courtship is far better than a quick marriage, which like most quick marriages can lead to a messy divorce.
Michael Gurau is managing general partner of Clear Venture Partners, a $50 million fund-in-formation focusing on New England. You can reach him at firstname.lastname@example.org.