Matt Cohen
Many VCs tout their mentorship and hands-on approach to founders, especially those who run early-stage startups. But in the recent era of lightning-fast rounds closing at sky-high valuations, the cap tables of early-stage startups are becoming increasingly crowded.
This isn’t to say that the value VCs bring has diminished. If anything, it’s quite the opposite — this new dynamic is forcing founders to be extremely selective about exactly who is sitting around their mentorship table. It’s simply not possible to have numerous deep and meaningful relationships to extract maximum value at the early stage from seasoned investors.
Founders should definitely pursue big rounds at sky-high valuations, but it’s important that they recognize how important it is to manage who they allow into their mentorship circles. Initially, founders should make sure their first layer consists of the real “doers” — usually angels and early venture investors who founders meet with weekly (or more frequently) to help solve some of the most granular problems.
Everything from hiring to operational hurdles all the way to deeper, more personal challenges like balancing family life with a rapidly growing startup.
This circle is where the real mentorship happens, where founders can be open and vulnerable. For obvious reasons, this circle has to be small, and usually consist of two to six people at most. Anything more simply becomes unwieldy and leaves founders spending more time managing these relationships than actually building their company.
The second layer should consist of the “quarterly crowd” of investors. These aren’t necessarily people who are uninterested or unwilling to participate in the nitty gritty of running the company, but this circle tends to consist of VCs who make dozens of investments per year. They, like their founders, aren’t capable of managing 50 relationships on a weekly basis, so their touch points on company issues tend to move slower or less frequently.
That isn’t necessarily a bad thing, and we often see this circle of investors making extremely meaningful impacts on their portfolio companies through networking opportunities, key hires, partnerships and investor intros. Occasionally, they’ll roll up their sleeves on certain issues, but founders should expect this circle to move a bit slower and be less engaged than their closest group of investors.
The most distant group of investors, say the outer layer, seems to be the most rapidly growing circle in recent months. Massive liquidity in the monetary systems, huge IPO returns and massive growth in the VC space has led to increased competition in funding rounds. These dynamics have given rise to huge valuations, huge check sizes and funding rounds that close in days or weeks instead of months.
Founders have unprecedented leverage in this competitive market and are often able to set the terms, create FOMO and accelerate the hype train to never-before-seen speeds. They are able to raise huge rounds that often create crowded cap tables full of excited-to-be-here strangers. While some of the investors in this group are more than happy to lend a helping hand and make themselves available to solve problems and mentor founders, many of them write the check and are never heard from again.
There’s certainly a place for this group in the founder/investor ecosystem, but it’s important that founders manage their expectations with the outer layer and remember that they should always have a strong foundation of mentors in the inner and middle layers who they can consistently count on.
Founders should also be aware of a few pitfalls that arise when building these circles. First of all, get references! Talk to other founders in your network and within the portfolios of the investors you’re considering. Use direct messages and calls instead of partner introductions in order to remove any incentive they might have to provide fluffy or inaccurate information.
Next, test the waters with your potential investors before committing. See if they are willing to provide some type of value-add support before they write the check — like how developers are given take-home assignments when applying for a new role. Feel free to request take-home assignments from your potential investors and measure their responses accordingly. Lastly, make sure that every investor/adviser has some of their personal money in the game. Even if the investment is small, any amount better aligns founders and advisers for the long term.
If any investors ask for advisory shares, make sure they are on a vesting schedule similar to the way employees are, and make sure you provide clearly defined KPIs to determine success. It’s also best to only offer advisory shares to strategic investors, not institutional ones.
How founders manage their VC circles can mean the difference in success or failure for a thousand different reasons. Failure to leverage layer-one VCs could mean that the company never gets off the ground, failure to manage the middle layer could hinder the pace of scaling, and failure to manage the outer layer could result in extreme dilution for founders. However, if founders assemble their VC circles properly, amazing things can happen — and they do.
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