Where to focus when “dating” investors

Posted on May 5, 2010. Filed under: startups, Uncategorized, venture capital | Tags: , , , |

One of the most important factors in the success or failure of a venture capital firm is their ability to attract and partner with entrepreneurs whose financings are competitive.  These “top tier” entrepreneurs have either built an asset which is visibly valuable to the market (all investors) or achieved something in a previous endeavor which differentiates them from the average early stage startup.  In this scenario VC’s are actually competing for the opportunity to invest in a company.

Last night I stumbled into a conversation between one of General Catalyst’s Limited Partners (LP) and a group of young entrepreneurs that broadly fit the bill of “top tier” founders.  This LP is responsible for investing the endowment of a major university, and his job is to measure the efficacy and trajectory of the funds in which his endowment is invested.  There are concrete metrics of success and failure in VC (namely returns and exits), but because those metrics don’t materialize for 3-10 years from the time a new fund is closed, LP’s must use softer metrics to measure the health of a fund.  This particular LP, recognizing the importance of a firm’s brand in winning competitive deals, asked these 3 young founders the following question: “When you meet investors and are deciding who you want to work with, what factors influence your decision?”

In listening to their responses, many of which echoed the value propositions a fund would use to market themselves into a deal (i.e. team building, relationships, introductions, etc..), I realized that my view of what makes an interesting investor may be abnormal.  To me, there are 3 things worth paying attention to:

1)      Incremental data: as a founder, you are constantly making decisions based on incomplete data sets.  An investor sits above your market, and through investments and involvement in companies adjacent to your product or market, or through past experience building analogous products or companies to yours, they represent access to a more complete dataset.  With more complete data comes better decision making, so an investor’s ability to ethically and frequently improve your datasets is of real importance.  If you’re building a company that is dependant or interfacing with the twitter ecosystem, there is an obvious advantage to having Fred Wilson or Jack Dorsey as investors.

2) Incremental thinking: When speaking with investors, my goal would be to communicate all of the important data I have as clearly and quickly as possible.  More often than not, as a founder, you will have spent way more time studying and understanding your market than an investor, but I think the goal of getting to know an investor should be to learn how they think.  Get them up to speed as quickly as possible, and then see if, based on a common dataset (or even better, with a common dataset, plus their incremental dataset), the investor identifies the 3-4 most important levers that impact your strategy and vision.  Ideally, you will see eye to eye, but then you hope they will push you with new thinking and ideas that you would not have arrived at without their help.  This incremental thinking and analysis will be something you can look for from an investor over the life of your startup.  The more data you collect as you continue to execute, and as your market evolves, the more important it becomes to have an investor who will be capable and excited to help your interpret it when making directional decisions. (NOTE: I hear many founders talk about wanting their investors to give them money and then “get out of the way.”  This is arrogant and an underutilization of a relationship that should be a major boon to your company)

3) Trust: I can’t stress enough the importance of trust in a relationship with investors.  There are different levels of trust.  First and foremost, you need to be able to look the guy or girl in the eye from whom you are raising capital and see that they are a good person.  Ask yourself, “is this guy ethical? Do we share common values? Can I predict how he will react under stressful situations and do I trust that he won’t compromise our common values no matter what the circumstance?”  If you can answer yes to that level of trust, the next layer of trust is trust that you can expose all the data you have without fear.  Many founders feel like they have to “manage” their investors, share the good data, and deemphasize or mask the bad data.  This feeling largely comes from a lack of predictability around an investor’s response to bad data.  Personally, I would look for an investor who you feel comfortable exposing your weaknesses to.  Trust them with the whole dataset and you can maximize the “incremental thinking” piece of the equation.  Trust them with only a partial dataset and you reduce the likelihood of success.  I guess I’m saying find someone you trust not to freak out when bad data emerges, because I can guarantee you…it will.

So to recap, look for data-driven thinkers with experience executing around dynamic and changing datasets in a fashion and cadence that is consistent with your personality and ideals.    

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    I’m a NYC based investor and entrepreneur. I've started a few companies and a venture capital firm. You can email me at Jordan.Cooper@gmail.com (p.s. i don’t use spell check…deal with it)

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