What is the formula for a great founder-VC relationship?
Ekaterina Almasque, General Partner at OpenOcean shares her thoughts on the key traits for a successful Founder-VC relationship.
In many instances, it is critical for startups to receive an investment from a VC fund. The expertise and capital injection provided by a VC can be just what founders need in order to raise their business to new heights. The tech start-up ecosystem has particularly thrived during the COVID-19 pandemic. According to data from Dealroom, VC investment in tech start-ups has hit record highs in H1 of 2021, with Europe leading the way attracting deals worth €49 billion – more than USA, China and Asia.
However, the road to long-term success is far from assured. Recent research from CBInsights showed that 70% of tech startups fail, usually within 20 months of completing their first round of funding.
Having a strong framework for businesses to follow is vital for the health and success of your VC backed business. Signing an investment deal naturally is the first step, but how do you navigate a road full of obstacles and manage the crippling pressure to be the percentage that succeeds?
I believe that there are five key elements in order to create a successful VC-founder relationship:
- Ensure expectations are set from the get-go
It is imperative that both parties work together (ideally for a couple of months) before signing an investment deal. This way, the terms of the relationship can be set before a contract is signed.
This can prove to be especially beneficial to VCs, as they have the time to clearly set out their stall to founders – everything from short term view of how they see the investment being leveraged to a vision for the future of the firm. Furthermore, clarification is key. The founder must be clear on what they are looking for in an investor. This is critical for the first discussions that take place, as a failure in transparency can do more harm than good in the long run.
It is especially important for founders to take the time to find a VC with enough experience to understand what their company offers. Founders often will be persistent in their pursuit of capital, sacrificing the opportunity to seek out VCs with in-house expertise on the specific requirements of the tech industry. These are the people who are more than qualified to provide meaningful value to the business and will be able to aid the business in its growth.
- The investor should be trusted
Use your investors. They can deliver a wealth of experience from their career and portfolio companies to guide you on your next steps.
When VC investment arrives, start-ups can find themselves facing a surge of new priorities each day, from who to hire to making the decision on which markets should be targeted. It can be quite overwhelming, so an investor should be there to provide unconditional support in this new phase of a founder’s journey. Typically, investors are beneficial in helping founders figure out the strategy, such as making introductions, and even go so far to help create a nurturing environment for a founder as they look to grow the business.
In all my years of experience, one particular thing has stood out to me. Founders value trust above all else. Taking a start-up to unicorn status and beyond is not easy in the slightest. It requires an understanding of the challenges founders face in today’s market. It also requires someone who is always willing to put in the time and effort to help turn the founder’s vision into reality.
- Founders must bring their investors with them
I recognise that it can be difficult for founders to trust a new investor. Nonetheless, it is important to remember that investors want to see the business flourish too. Scaling a business is vastly different from starting one, as both require different needs and requirements. It is inevitable that difficult decisions will need to be made. As the business grows, the founder will need to bear the weight of responsibilities that are required on the organisation’s journey.
Because of this, it is important that founders are open-minded. Staying rigidly attached to the original vision of your business is not always the best choice. The experience and insights that investors will provide you is priceless, and founders must be ready to accept that as the business reaches new heights.
Finding this open mindedness, whilst still retaining the sweeping ambitions present in all great founders, will see firms thrive. Jan Erik Solem, CEO & co-founder of Mapillary, the street-level imagery platform, described in one interview how: “It never really felt daunting to enter the space. It just made sense and we saw the need for Mapillary from day one.” I was lucky enough to work with Jan-Erik on this journey for his business, and it was energising that he was so confident in his success, despite the steep competition he faced from the large tech players.
- Invest in the relationship over time
Building a strong and trusting relationship takes time. Founders and investors should frequently spend time learning about one another. In time, the relationship will grow stronger, and the fruits of your efforts will be reaped. This learning stage is particularly crucial in the run up to the initial investment, as a start-up and VC get to grips with what is required for the future success of the company.
For series A VCs like OpenOcean, nurturing a founder-VC relationship from the start is essential for securing meaningful and long-lasting investments in your portfolio.
Frequent communication is also key. During our early work with the founders of hyperconverged infrastructure firm Sunlight.io, we found weekly meetings and informal catch-ups were key to understanding Sunlight’s vision and how to match our investment to its needs.
- Experience is everything
The final component needed for a successful founder-VC relationship is experience – particularly in the changing and evolving demands of the technology industry. It is clear we are entering a new economy where data is a key enabler for better business decision making and ultimately building a fairer society for all.
Investors with experience of the changing landscape of tech are best placed to understand the founders’ vision and step up to provide meaningful counsel. Ideally, this should come from someone who has direct experience as a founder, someone who has tried-and-tested credibility and understands what it takes to create cutting edge products and technologies and deliver them to market.
Together these five elements provide a formula that all VCs and founders can follow and apply to help shape the trajectories of start-ups and their investment in the exciting future for the tech economy.