Last week was Valor’s regular investor advisory committee meeting, when some of our partners review a fraction of the pipeline to provide feedback. The meeting points out the extremely small number of startups we actually invest in relative to the number we are pitched by, or see in person. This got me thinking about all the no’s. Many of them are “good news” in a manner of speaking.
There are two types of founders seeking capital
The two types are those who want just money, and those who want money and some support. The ones who want just money aren’t a good fit for our fund style. So that weeds us out for them.
Of those founders who prefer money with support–call them heavy investments because it’s time + capital–they have to be a fit for our partnership. We want to have insights or relationships that can add value for the startup’s exit, in addition to the value in equity we purchased with capital.
It’s not you, it’s us
So when we look at a growing business and say “It’s not you, it’s us,” that’s real. It means we would be “dumb money” on your cap table. Here are some of the internal bars we think about measuring ourselves against, on a scale of the years we will hold that investment:
- Can we introduce talent that will be a transformational fit?
- Do we know customers? A number of them or just one or two?
- Can we coach or mentor the founding team in some way that will help them grow faster?
- Do we know related technologies that will help them take off?
- Can we get them unfair introductions to clear acquirers? Who? How soon?
- Is there enough governance in place at the startup that our contributions can be regular (like on a board rhythm or quarterly sales true-up) or are they going to be ad hoc because there aren’t management rhythms in place yet?
We aren’t looking for a table entry–we’re looking for transformational investments.
When I think about all the founder stories gone sour because of having the wrong investor at the table, our internal bar of transformational investment makes a lot of sense. It helps inoculate against painful founder/investor relationships and deals that rot from the inside. When we commit to a founder, we believe our capital and our connections are meaningful in scale and scope for the adventure that founder is on.
What other bars do you think an investor should measure themselves by before investing?