No Two Venture Funds Are the Same
How to Find Founder-Investor Fit
By Bonnie Foley-Wong, Founder, Pique Ventures
Start-ups and early-stage ventures are not your standard types of businesses. By that, I mean there are a lot of factors that could impact future success and a lot of uncertainties. Early-stage ventures may be testing a new market, introducing a new innovation, or anticipating or influencing a change in behaviour in their customers. This is very different from operating in a mature industry or entering an established market where the metrics of success and growth are clear.
Similarly, how investors evaluate early-stage ventures is not standardized. Unlike financing commercial property or even a standard business loan where there are well-established financial ratios and indicators that investors and lenders look for, among venture capital investors (VCs) there is a lot of variation as well as subjective factors that they use to decide whether an opportunity is worth the risk.
While there is more agreement around some key metrics (like financial health and growth, customer acquisition, and sales and market metrics), different VCs will place emphasis on different factors they believe are indicators of future potential and performance. Some VCs rely on pattern-matching and other extrapolations to predict success—such as investing solely in alumni of prominent schools, or alumni of large successful companies and brands, or even competitive athletes to the exclusion of other groups. Other VCs, myself included, believe the quality of the combination of VC and entrepreneur can make a difference in business success: entrepreneurs not only have to find product-market fit, but also founder-investor fit.
To help your clients in their search for a good founder-investor fit, keep these principles in mind:
- Start with why. Simon Sinek’s premise of “start with why,” as it relates to product development, resonates with a lot of people. But it is also true about founder-investor relationships: entrepreneurs should be clear on their purpose. The starting point for any new investor relationship is knowing their own “why.” Help your clients figure out their “why” and communicate that to potential investors.
- Imagine an ideal investor. An ideal investor should be aligned around the same purpose but what other skills, expertise, or values do they bring? Where are they located? What is their approach to investing and building relationships with the founders and businesses in which they invest? Imagine what the interaction with an ideal investor would look and feel like. This envisioning exercise helps lay the groundwork so that entrepreneurs can recognize that alignment and identify a good match when they meet potential investors.
- Research and do your homework. Business advisors can support entrepreneurs in this area as well by sharing what they know about investors in their own network. Entrepreneurs should be prepared and find out what they can about investors ahead of time. What other ventures are in their portfolio? How have they helped other founders? What topics or areas of expertise are investors writing about or speaking about?
- Ask questions. Whenever I stepped into a meeting with a founder, I knew that they were doing their due diligence with me as much as I was doing my due diligence with them. Entrepreneurs should take the opportunity to ask open-ended and calibrated questions (“how” and “what” questions that encourage openness and help them learn more about the other person) to gain a better understanding of investors they meet.
- Decide if there is sufficient alignment and complementarity. Business advisors can add value by helping entrepreneurs make decisions about whether they fit an investor’s pattern, whether an investor fits their pattern, and whether their differences complement each other.
I believe that a healthy and constructive relationship between founders and investors yields better and more enjoyable outcomes. Indeed, investment relationships are a two-way street. Once entrepreneurs find a founder-investor fit, there are things they can do to continue to cultivate generative relationships with their investors. As business advisors, you play a key role in guiding your clients through these areas of discovery and mentorship:
- Be self-aware. For entrepreneurs, being self-aware includes knowing what their strengths are, what presses their buttons, how they react to and deal with stressful situations, their propensity for risk, what gets them excited . . . the list goes on. Being self-aware or improving their self-awareness helps them identify their fit in a founder-investor relationship.
- Develop conflict management skills. A precursor to good negotiating is knowing how to manage conflict. This is one of the biggest issues in investment relationships because founders and investors are not going to agree 100% of the time. Knowing how to disagree well is a real asset for working well together.
- Develop strong negotiation skills. This involves founders and investors carefully listening to each other and looking for points of collaboration with each other, rather than being adversarial or competitive. It requires empathy from both sides of the table.
- Spend time to get to know each other as people. Some people probably disagree with this. I’ve met a lot of people who prefer to separate business from other aspects of their life. But quite frankly, even in business and investment relationships, bringing the human factor into the relationships makes it far more enjoyable. All of my business and investment relationships have stood the test of time because we liked each other as people. Trust and loyalty develop when you get to know the whole person you’re working with.
- Celebrate together. Starting and building a business is hard work. To keep the energy and momentum going, it’s important to celebrate wins, milestones, and accomplishments. As an investor, I hosted events to bring my investor and entrepreneur communities together to celebrate and have been invited to celebrate with my founders as well. We celebrate the successes and remind each other we’re in this together.
- Go through hard times together. It’s a fact: bad times happen and they are great opportunities to work hard and get to know how the other person really thinks and works. Get through a hard time together and you know your relationship is solid.
- All of the above contribute to being able to communicate openly and honestly with each other.
Early-stage ventures are challenging but immensely rewarding. Having the opportunity to invest in them can be equally challenging and rewarding. So much of success for companies at this stage relies on people—specifically, founders and investors. Finding founder-investor fit and cultivating the relationships that form out of that alignment is critical and definitely worth the investment.