Investment from a VC fund is a core part of the journey of many start-ups, writes Ekaterina Almasque, General Partner at OpenOcean. However, for every success story, there are many more who fell by the wayside. One widely cited study from Harvard Business School estimated as many as 75% of VC-backed companies never return cash to investors.
Many companies struggle to convert initial optimism generated by investment into a long-term, successful path to growth. In many ways, signing an investment deal is only the beginning. After that point comes a long and winding road, full of obstacles to be overcome, a wide-ranging set of evolving priorities, and most of all, a constant pressure to achieve success.
To help build a VC-founder relationship, I believe there are five key steps to success.
1. Set expectations from the offset
Before any investment deal is signed, both parties need to work together (at least for a few weeks but ideally for a few months) to set the terms of the relationship. For VCs, this means a clear pitch to founders of how they see their investment being leveraged, a vision for the future of the firm, and the services they can offer. Many VCs benefit at this point from in-house experience of how to scale technology companies. In addition, the founder needs to be clear in initial discussions and put across what they are looking for in an investor; a failure to identify mismatched expectations at this early stage risks a more damaging breakdown further down the line.
In the tech sector, founders need to do their due diligence to find a VC with the experience to deeply understand their company’s offering. Too often founders relentlessly pursue capital at the expense of seeking out VCs with in-house expertise on the specific requirements of the tech industry today or a deep technological understanding. These are the people who will be able to deliver meaningful value to the business and help the business to thrive.
COVID-19 has certainly made this process more difficult. But even in an online-only world, founders and VCs managed to successfully adapt; teams still took the time to build relationships in a virtual setting, and as restrictions have eased, resumed some face-to-face contact. The tech start-up ecosystem bore the fruits of this innovative approach: VC investment in European tech is on track to hit €95 billion by the end of the year – a year-on-year growth rate of 143%.
2. The investor should be the trusted counsel
The best way to view an investor is as a reliable, trusted counsel for a founder. Whatever role they end up playing in the business, investors can bring a wide range of experience from their career and other companies in their portfolio to advise on the best way forward.
When VC investment comes in, particularly early stage, start-ups can find themselves scaling up at pace, and facing a raft of new priorities every day: who to hire, vetting potential partners and suppliers, choosing which markets to expand into, the list goes on. An investor should be there to provide unconditional support in this new phase of a founder’s journey, helping to figure out the strategy, making introductions, and generally going the extra mile to create a nurturing environment for a founder as they look to grow the business.
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I have found in my career that founders value one thing above all: trust. Taking a start-up to unicorn status and beyond is no mean feat. It requires someone who understands the challenges founders face in today’s market and is ready to back up the vote of confidence of the investment with an effort to convert the founder’s vision into reality. I saw this point in action when I coordinated an early investment in Graphcore, the British semiconductor company. By putting the time in with them to understand their business on a deep level I was able to step up into that role of trusted partner, who believes in their vision and can help brainstorm on the most challenging strategy questions. From there, the company has gone from success to success, reaching a multibillion valuation just in a few years since I co-led the Series A in 2016.
3. Founders must bring their investors with them
As a founder, it is all too easy to be distrustful of a new investor. A founder is often synonymous with the business, with their disruptive ideas and game-changing vision creating a company from nothing. Many come with a tightly focused vision for making their plans a reality. 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.”
Fundamentally, founders need to recognise that investors have a vested interest in seeing the business succeed. Founders must understand that scaling a business has very different requirements from starting one. Difficult choices will need to be made, as the founder takes on all the responsibilities that come with being a senior leader of a growing organisation.
At this critical moment, founders cannot stay rigidly attached to their original vision. Instead, founders need to be receptive to investors’ insights and experience to help mould the business for future success. Whitney Wolfe Herd, founder and CEO at Bumble, exemplifies this ingredient of founder success, describing in an interview how her “vision hasn’t changed; rather, it’s evolved just as Bumble has evolved over time”.
4. Put in the effort to build the relationship over time
A simple, often overlooked point is that, like any relationship, founders and investors need to put time and effort into nurturing the relationship over time. Think of it like dating; founders and investors need to take that time to learn about each other, and see if they are a good fit. This process is often most intense in the run up to making the initial investment, as a start-up and VC get to grips with what is required to partner for the future success of the company.
OpenOcean’s investment in quantum firm IQM, for example, was the culmination of discussions over a long period, with informal conversations with the founders building steadily into an eventual agreement to invest. This extended ‘dating’ meant we built up a strong understanding of the organisation, and crucially, how VC investment could help them scale and thrive.
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This is not a catch-all rule, but for series A VCs like OpenOcean, putting in that time at the start is vital for securing meaningful and long-lasting investments in your portfolio.
From there, transparent, regular communication is key.
During my early work with the founders of hyperconverged infrastructure firm Sunlight.io, we found that a weekly cadence of meetings and informal catch ups gave our investment team the opportunity to understand what Sunlight was trying to build, and most importantly, how to ensure our investment met the founders’ needs.
Crucially, when stressful and difficult moments emerge (and they will) don’t fall back on speculation and obfuscation. As trust builds over time, a safe environment should naturally emerge where investors and founders can honestly and transparently air issues and plot a course together to find a solution.
5. Sector experience is vital
The last, and perhaps more important ingredient of founder-VC success is sector experience. As hinted at earlier in this article, the technology industry is particularly reliant on this experience from investors. VCs need to challenge themselves to be more than impartial observers of the tech industry. The technology industry is changing beyond all recognition, with data creating new opportunities for innovation across all industries. From accelerating healthcare research to sweeping changes in how businesses analyse and assess performance, we are entering a new economy where data is a critical enabler for better business decision making and ultimately building a fairer society for all.
Investors need that deeply rooted perspective on the industries they are investing in if they are to understand the founders’ vision and provide meaningful, impactful counsel. In the best-case scenario, this knowledge comes from direct experience as a founder and technology building background, adding invaluable tried-and-tested credibility to the guidance to founders. Even better, if a VC has created cutting edge products and technologies in their past and understands the challenge of winning over the world (or at least the early adopters) with new ideas and concepts.
Together, these five key principles provide a framework for founders and VCs to reflect on their experience and apply to their own work to build relationships that last.
