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4 Ways to Align Interests Between Startup Founders and Investors

boardroom table

Are investors and startup founders on the same side of the table, or the opposite side?

A: Depends.

When things are going well, everyone feels like they’re on the same side of the table. When things are going not so well, it’s a different story. This is the reality of the startup-investor relationship. It’s not an easy relationship by any means. The relationship is made more challenging by the fact that it goes through an early honeymoon period shortly after an investment is made. Everyone is happy and excited. But then the real work begins. And the real difficulties.

I’d like to think that startup founders and investors are more often on the same side of the table than the opposite side, but if you believe that your relationship with investors will go smoothly from start to finish, you’re in for a big, big surprise.

Here are four suggestions for keeping startup founders and investors sitting closer to one another:

  1. Communicate! This is the most important thing for startup founders to do. Mark MacLeod (who I seem to be linking to constantly these days) spells it out nicely in his post, The Importance of Communication. The role of CEO (and frankly all startup founders) is to communicate regularly and transparently with investors and the Board of Directors. The minute you stop doing that, investors are instinctively going to shuffle to the other side of the table. You might not see it happening, until you need them for something significant … like participation in the next round of financing.
  2. Have measurable goals. I recently talked about how startups need to be much clearer and specific when describing how they plan to use the money they raise. When it comes to the relationship with investors, it’s critical that you have measurable, agreed upon goals. You might not hit the goals, but at least you’ll all have a collective starting point from which to get rolling. Without that – without understandable milestones that everyone is tracking – you and your investors can very quickly be heading on divergent paths.
  3. Be wary of ego. There’s no one in the startup business on the founder or investor side that doesn’t have an ego. I’m not sure you can survive in the startup game without one. But you have to be very careful about how that ego is projected and communicated. There’s a fine line between making a point and arguing for pride. There’s a fine line between sticking to your guns and blowing a gasket. And there’s a fine line between your personal goals and what’s best for your startup.
  4. Separate “lets have a beer together” and business. This is probably one of the most challenging things for startup founders to do, especially first-timers that haven’t raised capital before. Remember the honeymoon period? That can very quickly turn into the building of legitimate friendships with your investors. So you go and have a beer together. Shoot the shit. Talk hockey. Talk about startups in general. And so on. Your investors are now your friends. Except…

    In the board room, or when big business decisions have to be made (especially tough ones!), those friendships can disappear. Business is business. Recreational time is recreational time. Separating the two is difficult, because you may feel that you and your investors are simultaneously on the same side and opposite side of the table. It can be confusing and extremely frustrating. So keep an objective, level-head about things and make sure you separate friendship and business.

The startup founder – investor relationship is not an easy one. Some say it’s like a marriage, but it doesn’t have all the same qualities of a marriage. For starters, you don’t spend that much time with your investors, which means you have less time to work things out. There’s no concept in the startup world of, “Never go to bed angry” cause generally speaking you’re not sleeping with your investors (hhhmm … that would odd!)

Secondly, the relationship between startup founder and investor isn’t on equal footing. The investor has all the money. Of course, investors can’t exist without entrepreneurs, they’d have nothing to invest in, but in a marriage you (hopefully!) don’t have that sort of dynamic where one individual has to go to the other and ask for such “big things”, like millions of dollars.

I’m very intrigued by working in the venture capital or seed capital world. When I mention that to others, I often say, “I’d like to see what it’s like on the other side of the table…” But more importantly, I like the idea of helping startups at a very early stage. We need more “roll up the sleeves” activity from early stage investors, especially with first-time entrepreneurs that raise financing and then can feel left out in the cold. And that only gets worse if the entrepreneurs can’t get the stabilizing help they need.

Ultimately, investors and startup founders spend some time on the same side of the table and some time on the opposite side. As a startup founder you have to be prepared for both to happen, and work very, very, very hard to ensure the relationship is as strong as possible, all the time.

thank you to Shutterstock for providing the photo.

Use of Funds

Almost every investor pitch, whether to angel investors or venture capitalists involves one slide near the end about how much money a startup is looking to raise, milestones it hopes to achieve and generally, the “use of funds.”

The intent behind describing the use of funds is to explain to the potential investors how you plan on spending their money. Pretty straightforward, right?

The only problem is that most descriptions of “use of funds” are incredibly generic and standard, typically involving the following:

  • hire key personnel
  • product development
  • sales & marketing

Hhhm…the phrase, “No shit Sherlock…” comes to mind.

The discussion over use of funds between entrepreneur and investor needs to be much more open and detailed, because it’s absolutely essential to understand how much money you’ll need as a startup to get to the next critical milestone to justify the next major step.

That next major step might be an exit or raising additional financing. Or it might be neither, but if you think of each major step as a gate, then the money you raise at each step is there to help you determine whether or not you can successfully walk through the gate or break your nose on it.

Startups should have an idea on what critical milestones need to be achieved to justify the next big step. Maybe it’s a certain number of paying customers, or a certain number of free users. It could be traffic, or some other key metric (or a few metrics / targets) of importance. For example, it could be having 20 big brand clients, or securing some critical distribution and partnership deals. Whatever the metrics or milestones, if they can’t be spelled out very clearly then it becomes much harder to judge whether a startup is ready for the next big step. And that confuses the matter when that next big step is raising financing. What amount should be raised? What valuation? With who?

Mark MacLeod wrote a blog post about Angels vs. VCs. Go read it. And check out the comments too. Chris Arsenault at iNovia Capital makes some great points in there. He also mentioned (on Twitter) that 14 of iNovia’s 17 last investments included angels. That’s quite the mix.

Although there are definitely differences between angel investors and venture capitalists, if your “use of funds” plan is rock solid, and openly discussed during the investment process, the distinction is less important. What is absolutely crucial is how much money you need to raise to get you to the next big step.

An Introduction to Pitching Investors

Kudos to the students at McGill University for putting on some great events. I’m a big fan and advocate of anything that bridges the gap between students and startups.

I was invited to speak along with Daniel Drouet at an event entitled, “The Perfect Pitch”. I’m not sure such a thing exists, but I was happy to help out and present my experience and advice on pitching investors. Since the audience was comprised of students, with little startup and pitching experience, I tackled the basics — but hopefully everyone gets some value from this.

An Introduction to Pitching Investors

Here are some highlights and additional details from the presentation:

  1. Pitching is a combination of storytelling, selling and conversation. You have to understand what an investor pitch is before you can really do it, and the combination of storytelling, selling and conversation really does describe a good pitch. You need to tell a story, be engaging, interesting and creative. You need to sell, just like you would gun for a customer or partner. And you need to realize it’s a conversation, not a one-way diatribe. If investors aren’t asking questions, you’re in trouble.
  2. Pitching is a skill onto itself. Pitching investors is truly a skill. It takes a ton of practice. You get better with practice, and if you don’t do it for awhile you can lose your edge. So practice. Make an effort to pitch when the opportunity arises.
  3. Hearts – minds – wallets. That’s essentially the order of things you need to capture from investors. First go for their hearts and connect at an emotional level. Maybe they feel the pain you’re trying to solve. Maybe they love your team, or your vision for changing the world. Whatever the case, go for the heart first. Then you need to connect with them intellectually. Let’s look at the financials. The market. The meat & potatoes. Then go for the dough. This basically makes up the structure of any good story: beginning, middle and end.
  4. Hook them fast. You only have a few seconds before investors start to fade away. You need to hook them quickly with a strong elevator pitch. You need to answer the question, “What we’re all about”, with a strong, bold statement (or two).
  5. Know who you’re pitching. You need to research investors before you meet them. Find out what they’ve invested in (not just their fund). Find out their background (especially if they have an entrepreneurial one.) Reach out to portfolio companies and speak to them about the investors too. There’s no excuse for going into a pitch unprepared.
  6. Expect to be interrupted. It’s a conversation, and investors love to jump in. Don’t expect to just walk through your presentation precisely the way you’ve designed. It won’t happen. You can’t get flustered or take questions personally. Expect to be interrupted. Expect tough questions. Know your stuff and don’t fumble your way through a PowerPoint pitch deck to find the answers. The PowerPoint deck is just a guideline; really just a placeholder for the engaging, incredible pitch that you’re giving. You’re the one investors care about. And don’t worry if you don’t get through everything; go with the flow.
  7. Don’t act like the smartest person in the room. There’s no advantage to being the smart ass know-it-all. You need to be confident, but not to the point of being obnoxious or irritated. Admittedly, it’s a fine line.
  8. Cut the bullshit buzzwords. You don’t demonstrate expertise by throwing around industry buzzwords and acronyms. The investor might not be an expert in your industry, so make sure you speak to them in a way that they’ll understand. Remember: it’s a conversation, a dialogue and you’re trying to sell them. Most people don’t buy what they don’t understand (and in 30 seconds, I might add.)
  9. Avoid granular product detail. You won’t win points by going over your solution (or product) in finite detail. Describing every feature is going to send investors to their Blackberrys in a hurry. Tackle the high level aspects and features of your product — more importantly, impress upon the investors the benefits of the solution. Product demos are great – a picture does tell a thousand words – but be prepared for the demo to break. You should be able to walk through your product demo in its entirety without even showing it … “So what you’d see here if this was working…”
  10. Sex sells. We all know this, but it bears repeating. A well-designed presentation and/or product demo helps. Investors like sex. They’re human after all…
  11. You don’t know everything … and that’s OK. You can’t know everything, even about your own business. So don’t bother pretending. If you don’t know, admit it. Investors will have a mental checkbox for, “He’s not a total bullshit artist, scammer. Good.”
  12. Consider it a learning experience. Every time you pitch you’re going to learn something; about yourself, your business, investors, how the startup world works, etc. So one of the most important tips is that you walk away from every pitch with something of value: knowledge. As we all know, you’re not going to walk away from most pitches with money, so knowledge and a good learning experience is the next best thing.
  13. Have a memorable ending. Too many pitches end with the financial model, but it’s often one of the most dull (and messed up) parts of a pitch. It’s better to end with something much stronger. “The 4 most important things today that we’ve talked about: bam, bam, bam and bam.” Think of a way to end strongly, and make sure you hammer home your key messages.

Instead of including links throughout this post, I’ve included a bunch below (they’re also references in the presentation). Read everything I’ve listed below. There’s some amazing content about pitching in there. I’m especially fond of “12 Ways to Blow Your Investor Pitch”. It’s awesome.

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About Ben Yoskovitz
I recently joined GoInstant as VP Product. GoInstant changes how we use the web, making it shareable like never before.

I'm also a Founding Partner at Year One Labs, an early stage accelerator in Montreal. Previously I founded Standout Jobs (and sold it). I'm a hands-on startup guy, helping companies grow successfully from the idea forward. You can reach me at byosko at gmail dot com.

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