In the VC business, there is a running joke about the “Oh shit” board meeting – the first one that takes place after an investment has been made. That’s when all of the bad news that was hidden during the diligence process gets uncovered and the VC is faced with the reality of the business for the first time (and the founders are faced with the reality of the partner they just “married”!) At Homebrew, when we partner with a startup in support of the founders’ vision, we expect to share in the good, the bad and the ugly. And we expect to share in it well before we invest. After all, startups aren’t all rainbows and unicorns (see what I did there?🙂 ). Bad hires get made, product releases fall flat and revenue doesn’t materialize. These challenges are not the exception, they are the rule, particularly at the seed stage. So we believe that the key to successful relationships between founders and their VCs is one simple rule: No Surprises. And the application of that rule starts well before a formal partnership is formed between VCs and a founding team.
Accordingly, when we evaluate potential investment opportunities at Homebrew, we try to make the diligence process beyond the first meeting feel like a series of working sessions, which in part help expose potential surprises for both sides. We find that this approach provides us with both a better understanding of how the founders think and a deeper appreciation for the nuances of the business. Most importantly, it helps both sides get a feel for what it would be like to work together. In these sessions, we tend to be pretty open and direct about what we find compelling and concerning about the startup. We ask the entrepreneurs to be equally honest about not just their business, but also about the possibility of working with us. What questions or concerns do they have? What kind of help are they seeking from investors? Are they concerned about forming a board and having board meetings? Nothing is off limits in those sessions, because the last thing we want is for either side to go into a long-term relationship based on misinformation or misaligned expectations. We build the relationship on No Surprises.
On an ongoing basis, information needs to be shared openly and in a timely manner. As major investors in your company, it’s failure if we’re hearing significant news for the first time in a monthly email update or at a board meeting. No Surprises means that everyone has the same information at the same time so that they can react as a cohesive team. And the No Surprises rule should apply to both sides. Entrepreneurs should never be surprised by their VC, whether it’s related to personnel, business metrics, follow-on decisions or anything else. Trust is fundamental in startups, but it’s possibly even more important in an effectively permanent founder/VC relationship. And living by the No Surprises rule helps keep that foundation of trust pristine.
So do yourself a favor when talking to investors. Establish the No Surprises rule for both sides. You’ll avoid the “Oh shit” board meeting and have a great long-term partnership as a result.