Investment capital comes with all sorts of strings attached, especially for early-stage companies. The capital also comes with all sorts of investors attached, too, which begs a very important question for founders to consider: how do different types of early-stage investors work with founders?
Founders should recognize that not all early-stage investors are alike. In fact, the moment founders begin to fundraise, they will approach—and be approached by—many different early-stage investors who seek to work with founders in a variety of ways.
The different ways in which investors choose to work with you—the founding team of a compelling climate tech startup—will have a myriad of ramifications on your business, from how you prepare for board meetings to how you report your progress to how you approach future fundraises.
Founders should not avoid these differences, rather they should seek to understand them. Know your investors’ motivations, work styles, and goals, and you can better manage your board, cap table, and future fundraising. In other words, create an investor user manual—and use it!
Here are 11 considerations for founders in building an investor user manual:
- Some are investing with their own money; some are investing with others.
Individual investors are often investing based on their own experiences or an existing connection (i.e., a warm introduction from a trusted source) to the founder. They are also investing their own capital, which can lead to quick decisions. An investment pitch could quickly turn into a “yes,” followed by a request to “send me the docs and wiring instructions.” Some individual investors have gathered as angel groups. They can make quick decisions, too, but some of these groups have developed a more comprehensive process that can feel akin to an investment fund. Early-stage investment funds, more commonly known as venture funds, have developed comprehensive processes for a reason. The fund managers (also known as the general partners) are deploying other people’s capital (known as the limited partners or “LP’s”). Fund managers are being compensated to generate a target return for their LP’s by executing a clearly defined investment strategy. Therefore, they must proceed more cautiously. Fund managers will have their own internal processes to evaluate investments and render investment decisions. These processes take time—often months—and usually culminate in a deal lead (i.e., the fund manager who works with the founder) presenting to an investment committee for a final investment decision. Corporate venture capital (“CVC”) managers, who are investing the corporation’s capital off the corporate balance sheet or in a special investment vehicle established by the corporation, have similar processes. To make things even more challenging, CVC’s often have the additional hurdle of seeking the approval of business units that could potentially be customers of the startup.
- Timelines vary.
See above. Investors have incredibly different timelines when it comes to making their initial investment decision and future investment decisions. Some can say “yes” and wire funds that same week. When others say “yes,” it could start a process that could stretch into months and involve a variety of stakeholders before funding is wired. In some extreme cases, certain funds may have investment committees that only meet quarterly. It pays to know when those investment committee dates are, because more time means more work for you and more updates to financials you need to prepare.
- Know the fund.
When you’re working with fund managers, it is important that you learn as much about the fund as possible so that you can get an understanding of where you may fit into it. You’ll want to understand:
a. The size of the fund,
b. The lifecycle of the fund,
c. The hold period,
d. The average investment size, and
e. The total number of investments in the fund.
The characteristics of the fund will matter. If the fund is new and you’re one of the first investments, then you’re likely to enjoy more time in the fund before the investor will want an exit. There are downsides to being early, too, as you will also be evaluated against new opportunities for the fund at the same time that you’re looking for follow-on investment.
- Know what matters to them.
Beyond seeking an outsized return, investors will have different reasons which compel them to invest. All investors will seek and support companies which feature the magical trio of tech, team, and market. But each investor will have an attribute of your business that matters most to them. For example, for a fund that is technology-focused (i.e. carbon removal) or sector-specific (i.e., ag-tech), then your technology will matter a LOT to them. Deep diligence by PhD’s will follow. Others may focus on backing incredible people, which makes a team the most important feature and the potential for founder growth a driver of investment decisions. For corporate venture capital firms, the market is key, as they are often looking for technologies to address problems in markets critical to the corporation’s future earnings. Knowing the priority of their interests will help you figure out what to communicate to them as you solicit investment and work with them post-close.
- Dry powder varies.
Many individual investors will only be looking to invest once. But most funds should have dry powder (i.e., capital reserved for future investments) that they can deploy in companies in future funding rounds. Knowing the size of the fund, average investment size, and total number of investments will also give you a clear understanding of what dry powder, if any, the fund will have available. Dry powder is so important for future fundraisings. Ideally, you want your existing investors to commit—and share their commitment—as soon as you launch a future funding round. Existing investor satisfaction is great validation for future investors.
- Hands on or hands off.
Investor participation in your company’s operations will vary tremendously. Angel investors will often write a check and stay hands off. Some funds will do the same, especially if they are making a massive number of investments out of each fund (the fund managers simply won’t have enough time to pay attention to them all). But other funds will want to be hands on, and this hands-on approach can manifest itself in a variety of ways. Corporate venture capital firms can often be very involved, especially if they are investing in a startup to become a customer and an investor. Hands-on investors can provide meaningful benefit, but that benefit often requires the team to spend time with the investors.
- Board member or observer.
Build your board carefully. When you are negotiating terms of new investments, your lead investor(s) will likely want one or more board seats. Board participation maybe the price of doing business with these funds, as key shareholders do deserve adequate board representation. But be careful in terms of giving away board observation rights. Some investors may advocate for them, and it may seem like an easy give during a term sheet negotiation. In granting board observation rights, you are, however, welcoming folks into your board meetings who may blur the line between observer and participant.
- Call me maybe.
Shout out to Carly Rae Jepsen. As you build a syndicate of investors, you’ll quickly learn that their communication styles will vary greatly. Some talkers, some texters, some in-person coffee drinkers. Most folks, however, will still appreciate regular email communication. But don’t overlook phone calls. There’s nothing better to cut through confusion than a phone call. And you’ll want to understand when folks expect that phone call so you can keep good lines of communication open.
- Value add? Maybe.
Founders will come across a lot of investors who claim to be “value add” investors. To be clear, there are a lot of investors who do add value. Be sure to understand what that value is and ask yourself, do you need it?
- They will have scars.
We have life experiences that shape how we think. Investors are no different. They will come with experience as researchers, operators, investors, board members, and advisors, all of which will inform what they think of you and how they evaluate your business. Make sure all that experience leads to shared wisdom, not scars that prevent investors from seeing the potential of your business.
- No one, especially your investors, knows your company better than you.
Investors will supply capital and be a resource in varying degrees (see above, points 1-10), but it is ultimately up to the founding team to build and scale a compelling, enduring climate tech company.
As you build your investor user manual, reflect on how your investors (many of whom will also be board members) work with one another. These folks won’t have the same level of involvement as employees, but they are still part of the family and need to fit with you—the founders—and the business you’re aiming to build. And like any family—building a good user manual for co-existence will reap all sorts of dividends!
