<Founders: Eyes wide openSaturday, December 15th, 2012
by Roger Ehrenberg

Raising money is a hard and sometimes scary thing. Friends & family money might be relatively easy to raise but often comes with lots of emotional strings attached. “What if I lose their money? Might this adversely impact our relationship? Will I feel horrible and guilty?” Raising angel money is somewhat harder, but with less drama and entanglement. “These people believe in me and are trusting me, which is a huge obligation. But will any of these investors actually be able to help me to build my business?” And finally, securing venture investment is generally challenging for all but the brand-name and heavily pedigreed entrepreneurs, but hard work on both sides leads to a more balanced relationship: there are certainly clear expectations coming for the VC and often symmetrical wants and desires from the entrepreneur. And this is a good thing.

Early stage VCs and founders are bound together by a spiritual relationship around the founders’ mission. This is made more complicated by the financial and legal dynamics introduced by a financing. Taking VC money is like getting married: when it’s good it’s great and both productive and fulfilling. When it’s bad, however, splitting up is hard to do, both emotionally and logistically. So bringing a VC into the mix is not something that should be taken lightly.

However, if you do decide to take venture money, there are few things I’d recommend founders do to get the most out of the relationship:

Trust your new partners

I have heard way too many times from people who are ostensibly “founder friendly” that founders shouldn’t trust their investors but keep them at arms-length: they are simply not to be trusted. I have one word for this advice: bullshit. It is incumbent upon founders to do their homework and to pick their investors as carefully as they pick their co-founders and early employees. Each of these key relationships can and generally does have a material impact on the culture and future success of the company. The relationship with a lead investor is no different. But once you choose an investor, the value of having a truly trusting and respectful relationship is hard to quantify. If you constantly find yourself managing information flow and creating knowledge asymmetry between the founding team and the lead investor, something is fundamentally wrong. That energy spent “managing” could be spent engaging the investor – who is really your partner – on issues that are truly material to the prospects for the business. Use this leverage to your advantage.

Invest in relationships

Even after picking a great investor whom you trust, in order to get the greatest benefit from their skills, experiences and relationships you need to commit to building the relationship. This requires time on both sides to identify the best means of communication, the areas where the founders need the most help and where the investor can help plug the gaps and the right cadence of communication given the company’s stage and needs. Good things don’t just happen spontaneously; they require hard work. This relationship should be framed in the same manner as that of a key person in your personal life: there will invariably be ups and downs, but each is deeply committed to the other and have a vested interest in having things work out. If you’ve done a good job picking the right investor / partner, this investment will yield significant dividends over time.

Clearly communicate your expectations, wants and needs

Every relationship is different. What one founding team needs and wants can often be quite different than another due to background, team construction and business challenges. Even the most committed investor / partner can’t read the founder’s mind, and can’t possibly know what goes on day-to-day within the business. It is incumbent upon both the founder and the investor to communicate succinctly and honestly, with a bias towards actionable take-aways, e.g., “Can you interview these three Lead Developer candidates for us, as your perspective would be really helpful?” or “We’d love to get two proofs-of-concept going in different verticals. Can you help us identify the best potential candidates in [adtech] and [financial services]?” Good investor / partners love concrete deliverables because (a) it specifically helps their investment, (b) it feels good to help and (c) being recognized as a real (not bullshit) value-added investor both cements the relationship with the current founder and builds reputation among prospective founder / partners. In short, good communication breeds goodness all around.

Building a great relationship with a lead investor isn’t hard, but requires work both before the right partner is chosen and on an ongoing basis as the relationship evolves and the company is built. Problems arise when founders either pick an investor that isn’t the right fit or don’t properly invest in the relationship. From the investor perspective, few things are more frustrating than when you’ve done a ton of work to identify a team you want to work with and a business you want to help build, but where the founders don’t want to engage with you. And it’s a shame. My most satisfying founder relationships have strongly correlated with business outcomes, and I firmly believe that the “money is fungible” mantra is a load of bunk. But it’s up to the founders to decide on the go-it-alone or partner-with-investors path. My message is that if you do elect to take venture money, by all means do it the right way. Eyes wide open.

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