Understanding how to build good relationships with investors is essential for becoming an entrepreneur. Not all investors have the same goals – apart from wanting a positive return on their investment – so founders should take the time to understand how to properly build a relationship with traditional VCs, corporate VCs and private investors.
Both classic and corporate VCs want to see two main things: a bright, attention-grabbing mission statement and a solid, long-term business plan.
You can think of it as needing both style and substance. Angel investors are usually more flexible and can often be sold on a great idea and a charismatic, capable team.
Beyond that, interests begin to diverge. Here are my top tips for startups to build VC and investor relationships.
1) Know your audience
Classic VCs primarily focus on ROI, IRR and an attractive exit strategy in the 7-10 years range. When you’re dealing with classic VCs, it’s most important to prove beyond doubt that you have excellent market potential and a willingness to collaborate when it comes to decision-making and the future of the company.
An example of this is real estate tech unicorn Lessen. The company recently raised $170m (£127m) from a handful of classic VCs because of its approach to solving ongoing scalability issues in the real estate sector.
Investors see a straightforward path to profitability in the short term, so they’re willing to back the brand.
On the other hand, corporate VCs tend to take a different view of investing in startups. Most corporate VCs are more interested in overall synergy with their existing portfolio.
How will you fit into their established milieu? They want brands that will create value on their own and as a part of their “family” of companies. What will you bring to the table in terms of expertise, tech or innovation that will elevate their entire portfolio?
For instance, Zoom and Cisco recently cooperatively invested in the interoperability startup Mio. These two companies are competitors, but they both understand the long-term value of this brand’s success.
Comparatively, angel investors are much easier to deal with. They all have different reasons for investing.
While profit is preferred, they often back startups for reasons like portfolio diversification or to get involved in a new industry. If you can sell them on your idea, they’re far more willing to back you in the early stages.
2) Do your homework
Investors often expect varying degrees of control when they stake your startup. Some may want a small percentage, while others expect hands-on participation in day-to-day operations.
Corporate VCs are often more hands-off with investments. If things are running smoothly, they tend to limit their involvement to providing advice and resources over the long term.
Classic VCs typically want to be involved in steering the proverbial ship to minimise risk and maximise potential profit within their exit timeline.
In general, VCs will clearly outline expectations on their websites. Below are a few examples:
Greycroft prefers to act in an advisory capacity and focuses on a specific subset of businesses to invest in. It specifically seeks strong founding teams, large potential markets and high engagement.
Bain Capital focuses its investments on complex, niche and emerging markets. It takea a more flexible, long-haul view with its partnerships.
Silicon Valley darling Andreessen Horowitz (a16z) is a very hands-on, no-nonsense firm that prefers to build relationships rather than pure investments. It “invests in innovators”.
Therefore, part of doing your homework is coming prepared with a strategy tailored to each investor you approach.
The following list includes general documents investors will expect to see:
– A written “elevator pitch”. Make it short and attention-grabbing.
– The problem you’re solving. Make it concise, and back it up with data.
– An outline of your business plan that shows how you fit into the competitive landscape.
– A comprehensive bullet point business model.
– Brief bios for your management team.
– A one-page overview of financials, including revenue, expense and profit projections.
– A funding request and detailed plan for fund usage.
3) Don’t oversell
This goes for inviting investors onto your team and relying too much on high valuations.
Remember that adding an investor is like welcoming someone into your family. Your values and goals should align.
The VC market is flush with capital ($160bn worldwide and $25.5bn in London), so you shouldn’t simply jump at the first interested investor. Develop a relationship with like-minded investors, even if it takes extra time.
In the same vein, you should also be careful not to put too much stock in a high valuation. This can make it more difficult to get future funding. Be moderate when using your initial valuation to attract investors.
4) Look beyond dollar signs
Remember that there’s more to an investor than financials. When choosing investment partners, take a long view of the situation. What other types of value can they offer your business? What kinds of value can you provide to them?
An example of this is Y Combinator. It brands itself as “startup accelerators” that do more than toss money to promising companies. For most brands, Y Combinator’s true value is in the network, connections and lessons it provides to founders.
It can fill in knowledge gaps and provide honest, meaningful support to nurture success. Mentorship and boots-on-the-ground experience like that is immeasurably valuable to startups.
Conversely, be prepared to show potential investors what non-financial value you can provide. Maybe you have an attractive network of connections, or perhaps you’ve already laid the groundwork for a distinctive corporate culture. These things matter to investors who plan to be with you for the foreseeable future.
3) Connect with multiple investors
Never place your success in the hands of a single player. There are many reasons to have multiple investors on deck. For example, each comes with new connections and can promote and support you to other investors, which is important for raising later rounds.
Additionally, you should spread your funding across multiple investors so that you never wake up one day with no cash flow. I always recommend startups hire a veteran financial consultant to assist with this stage of business because 82% of startups fail due to lack of funds or poor cash flow management.
Not only will a financial consultant help you navigate how to handle investor relationships and networking, but they’ll also be able to make your financial planning documents far more credible and appealing to potential investors. They can even help with unbiased feedback and future growth plans.
Building investor relationships: Key takeaways
Regardless of which types of investors you choose to partner with, developing a robust and long-term relationship is vital to your company’s continued success.
Remember that VCs will each look for different things when investing capital, so be sure to have all of the necessary documentation and answers ready when you meet with them.
Don’t forget that it’s always better to underpromise and overdeliver. Placing too much faith in a high valuation or laying out wildly ambitious plans straight away can lead your startup to financial disaster.
Finally, be sure to vet every investor just as thoroughly as they vet you. This is a long-term relationship, and you should always enter it carefully. Choosing the right investor can make or break your prospects.
Valeria Kogan is co-founder and CEO of Fermata, a company that develops sustainable computer vision solutions for precise plant monitoring in greenhouses.