Fred Wilson and Bijan Sabet recently wrote really wonderful posts about how important personal chemistry and the ability to imagine working at the company are when making an investment in a startup. I couldn’t agree more with both of them. When I recall investments I’ve made over the course of my career, the common thread is that the teams and ideas had “emotional resonance” for me. There was something about the teams and opportunities that spoke to my heart as much as my mind – to such an extent that I wished for them to succeed badly enough to be irrationally optimistic about their odds of success. I think it’s rare for an investor to make a commitment of his or her time and capital when that emotional resonance is missing.
At Homebrew, that feeling often comes when I hear that the Why behind the founding of a company comes from a very personal place (read about the Why behind our portfolio partners on our blog). It’s easy to get excited about working with mission-driven founders. Having the opportunity to partner with them as they build the companies they envision is a true joy. That emotional resonance leads to tight alignment with the founders’ vision, goals and preferences and a fantastic relationship because our feelings of success are inseparable from their success in building their companies.
A solid working relationship between a VC and founders depends on this alignment, as well as mutual trust and respect. While most entrepreneurs may take that as a given, they often don’t appreciate that it’s just as important for the relationship between the two or more VCs that are jointly investing in a startup. When raising capital from more than one VC, particularly where the VCs are investing similar amounts of money, it’s critical that the founders make sure that the VCs are aligned with them and each other and also have mutual trust and respect. Otherwise, they can expect that disagreements between investors will make an already difficult startup road that much rockier. So how can you check if your potential investors are on the same page?
Talk about it: Have conversations together and separately with the VCs about everything from near-term milestones to financing strategy to long term vision. The more you hear how the VCs are thinking about your business the more data you’ll have to determine whether they have a shared perspective.
Make them talk: Good investors will want to build a relationship with co-investors before committing capital because alignment, trust and respect amongst all parties should be as important to them as it is to you. No one should want to go into a set of relationships expecting that there is likely to be discord.
Negotiate: As you’re working through the terms of your financing, you’ll most certainly have to negotiate with each VC separately. Inevitably, you’ll have have to talk about issues where the the VCs differ with each other and/or with you. How much are the VCs trying to understand your preferences versus attempting to position themselves favorably against each other? Are they open to talking through issues with the other VC? Negotiations can reveal a lot about how the VCs will work together and with you after the investment is completed.
Personal chemistry, the desire to work together and emotional resonance are just as important when selecting co-investors as it is when selecting a team to invest in or a choosing a single VC investor. Don’t make the mistake of assuming that your co-investors are aligned or accepting that they don’t necessarily share the same perspectives. It’s hard enough to build a company when everyone is working well together. It becomes much harder when the people who have significant influence on the company (investors and founders alike) don’t have a shared definition of success.