Be cautious, the most convincing venture capitalist is not necessarily the most helpful investor for your company. Several brand name investors (according to founders) are pretty useless. The wrong venture capital investor can even be detrimental to your startup.
Despite what they might want you to think, the fact is that several VCs simply don’t add value to the startups they invest in. Instead, they focus on picking the right startups, get a good investing track record and ultimately attract better deal flow. They can manage all this despite being poor advisors.
What a bad Venture Capital Investor looks like
- Tries to negotiate terms after you agree a term sheet and sign up exclusivity
- Adds no value in a board meeting
- Makes unfair/unhelpful information requests
- Hates bad news and doesn’t help you solve problems
- Never follows through on their word
- Takes credit for your ideas
- Has too many portfolio companies to pay you any attention
- Has a track record of firing founders; Steve Jobs, Travis Kalanick (Uber) and Adam Neuman (WeWork) are three of the most famous cases that I can think of, but there are plenty more examples.
How to spot low value add venture capital investors
Some VC firms go to great lengths when it comes to getting visibility. They actively blog and send out press releases and speak at mainstream events.
Now this alone is not a bad thing but having a public presence doesn’t make them a great advisor. Listen carefully to the stories they and their portfolio companies tell. When/how did their VC add value?
Most recently there was a piece in the Business Insider where someone was claiming to earn $200k to be the ghostwriter for famous Venture Capitalists! So bear that in mind, even the most active investors on social media might simply be outsourcing the task to someone else!
Top tier venture capital funds see all the best start-ups looking for investment. This access to premium deal flow helps a mediocre investor. If this investor works for a VC fund with a good track record, then they will enjoy better access to invest then a great person at a mediocre firm.
What is the actual track record of your VC principle? Do they personally have a well-established network in the industry you want to expand into?
- Seeing the future
Some venture capitalists are very good at seeing the future. Investing into mega trends early, such as crypto, can generate phenomenal returns. However, simply being early to the next thing does not mean that the venture capitalist gives good advice. Rather, they are good at knowing what investments to pick.
Some terrible advisors have done really well as investors by betting on startups that largely ignored their advice.
Attributes to look for in good Venture Capital funds
- Have a large network.
The larger their network, the more doors they can open for you. Nothing beats a direct intro to someone you need to meet.
- Has a good reputation.
Helps with networking + giving our start-up more credibility when it comes to recruiting or negotiating large contracts. Can help make future fundraising easier.
- Has sector expertise
Sector focus is advantageous to founders. You can absorb more tacit knowledge from their past experiences and avoid common pitfalls. The network you wish to reach is probably already familiar with your investor.
- Has operational expertise
The VC might be a previous entrepreneur or have an entrepreneur in residence o help first time founders with the logistics of scaling.
- Has deal experience
You don’t want to be dealing with a rookie. Does the person have prior deal experience? Have they negotiated a contract like your before?
Shouldn’t be a deal breaker, but will create leverage when negotiating deal terms if they are a new fund and need to make their first few investments.
- Alignment of engagement
Some founders embrace VC engagement, others wish to minimise it as much as possible. Do your dd with some of their portfolio investments and find out what their communication is like 1y after investment / month on month.
- Ability to add value
Most founders report receiving no extra value from their VCs other than financial. Look for the level of engagement you get from interested parties. Do they make connections for you? Do they email you with interesting ideas to enhance your value proposition?
- Do you like them?
The traditional VC structure is to allow the person in the team who spotted the deal to take the lead on behalf of the firm and become the main point of contact. This might not be ideal if you think another more senior partner is better suited to the role.
They need to be the first person you want to call when the shit hits the fan.
I know many VC’s that are amazing partners to founders in thick and thin. But their reputation with founders that pitch them is mixed. Conversely, it’s very common that investors seem wonderful to work with when they are trying to get access to a deal, but then act totally differently once they are on board. There are a couple reasons for this.