Decoding Founder-VC #4 Post funding relationship

In our previous discussions on the Founder-VC relationship, we delved into the pre-funding dynamics. Once the investor wires the money, the relationship shifts significantly. At this juncture, the Principal-Agent analogy comes to life. The investor relinquishes their strongest leverage — the capital. While they retain some control through contractual reporting rights, board seats, and veto rights on essential decisions, they are not involved in daily operations and must rely on the founder's transparency. Meanwhile, the founder now possesses the crucial funding and focuses on their company, valuing customer interactions more than reporting calls.

As time progresses, operational challenges often extend timelines, and founders realize that even substantial financing rounds have limits. When the funds start to constrain growth again, the dynamic shifts once more. The investor might become the essential source of new capital. This time, the relationship focuses on performance and the investor's knowledge of the founder rather than initial expectations. This shift can steepen the power allocation, potentially making funding conditions less favorable than during the initial meeting.

While these dynamics are universal in Founder-Investor relationships, certain practices can infuse serendipity into the interaction. Here, we discuss some practices we implement with our portfolio companies (Portcos) and lessons learned from founders who engage us beyond the financial aspect.

 

Founder's Duty: Proactive Engagement

From a founder’s perspective, even a brief, five-minute update can be valuable. It doesn’t always have to be groundbreaking. Here are four ways founders can leverage their investors' expertise and experience:

 

1. Regular Updates

Regular updates on progress, achievements, and challenges are crucial. Investors appreciate transparency and want to understand how their investment is being utilized and what value is being created. Monthly or quarterly reports keep investors informed and engaged, allowing for feedback and suggestions. Highlighting key metrics, milestones, and goals demonstrates how performance is being measured and improved.

 

2. Ask for Assistance!

Seeking assistance on specific challenges or opportunities is a simple yet effective way to leverage investors' expertise. Investors have witnessed many startups succeed and fail, offering valuable lessons learned, best practices, and industry trends. Regularly reaching out for input on strategy, product, market, team, or other business aspects can be beneficial. Investors can also introduce other experts or mentors to help solve problems or accelerate growth.

 

3. Open Communication & Invitations

Inviting investors to relevant events such as product launches, demos, pitches, customer meetings, industry conferences, or networking sessions showcases your work and solicits feedback. These events also provide opportunities to introduce investors to customers, partners, or potential investors, learn from their experiences, and build trust and rapport.

 

4. Learn from Their Mistakes

Learning from investors' mistakes is invaluable. Investors, having made their share of errors and failures, can teach how to avoid common pitfalls, cope with setbacks, pivot when necessary, and overcome challenges. Asking investors to share their stories of failure and success, and the lessons learned, can provide critical insights. Constructive feedback and criticism can be used to improve product, strategy, or execution.

 

 VC's Duty: Beyond Contractual Rights

Investors need to go beyond just using contractual rights like board seats and reporting. Understanding the challenges and providing support is crucial. This can involve strategic meetings, budgeting sessions, dry runs on pitch decks, attending regular meetings with the founder or team members, or leveraging networks to bring attractive leads. Here are four ways VCs can add value:

 

1. Making Introductions

Advocating for a founder and introducing them to a network of investors is immensely helpful as they scale. This support may also include refining pitches and strengthening the company narrative.

 

2. Hiring Talent

Connecting founders to top talent within the investor’s network or creating a job board for portfolio companies can improve the quality of applicants and reduce the time needed to attract and retain talent.

 

3. Access to Learnings

VCs can offer valuable experience to early-stage or first-time founders. Sharing learnings from portfolio companies facing similar challenges or operating within the same industry can be particularly beneficial.

 

4. Collaborating on Projects

Collaborating with founders on long-term strategic projects, competitive landscaping, and more allows for a deeper understanding of the business and provides more targeted support.

 

Conclusion

At Malpani Ventures, we view ourselves as a services firm, our job is to make the founder's job a little bit more easier than simply providing capital.

Many founders feel they don’t receive sufficient value from their investors, even in areas like follow-on rounds, where specialized experience is crucial. Conversely, VCs often gripe that founders only reach out when they need something signed or during another funding round. Consistent qualitative and quantitative updates are essential. All relationships are built on trust, and trust is built on communication. It's vital to determine the "what, who, how, and when" of communication to foster a strong Founder-VC relationship.

 

Some more reading material:

https://www.linkedin.com/pulse/adding-value-vc-my-top-5-approaches-siddarth-jain?utm_source=share&utm_medium=member_ios&utm_campaign=share_via

https://blog.creandum.com/do-vcs-add-value-4-years-later-the-answer-remains-sometimes-49c53a8865b4

https://www.vcstack.io/blog/vc-value-add

http://christophjanz.blogspot.com/2014/11/good-vcs-bad-vcs.html

https://www.capnamic.com//post/power-dynamics-in-investor-founder-relations

 https://www.linkedin.com/advice/0/how-can-you-leverage-your-investors-expertise-experience-cmcnc

https://www.foundercatalyst.com/blog/making-your-founder-funder-relationship-work

 

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