In a previous post, I wrote about investors increasingly turning to alternative investments in an effort to generate uncorrelated returns, hedge risk and diversify their asset allocation. This trend is highly likely to continue into the later part of 2014 when the implementation of Title III of the JOBS Act becomes actionable, allowing everyone to invest in startups regardless of income or net worth. It is a much anticipated change that is poised to streamline the way early-stage startup investing happens.
There are many strategies for choosing attractive startup investments, but what happens once the investment is actually made? In my time of working with innovative companies in the investment landscape, I have noticed that the most successful investors take an active role in their investments to help drive value for the business, and ultimately, returns. Here are three practices I have seen the most disciplined and successful investors implement to increase the value of their investment.
1. Bring value and resources
A great founding team funded by strategic investors is a lethal combination. Funding is an essential resource for the birth and growth of a company, but having an investor who brings strategic value to the company becomes an invaluable asset and competitive advantage.
Do you have market experience and industry knowledge that could benefit the founding team? Are there any introductions you could make to strategic partners, sales leads, or other critical game changers? Benjamin Ling partner at Khosla Ventures, establishes what he calls a social contract with entrepreneurs, which clearly lays out what he will specifically do for that startup. Specific items you can suggest in the social contract can be, as Ling shares, help with recruiting, sourcing and interviewing candidates, committing a certain amount of time per month (even as little as an hour) to serve as a sounding board and making introductions to strategic partners and investors. In his experience, first time entrepreneurs really benefit from that support in picking the right people to join the team, which is among the most important tasks startups have to nail.
Ling’s approach is applicable to both investors and entrepreneurs and should be the new gold standard. The ideal time to establish a social contract is before the investment is finalized so that the expectations and deliverables are crystal clear, minimizing the chances of disappointment, miscommunications or misunderstandings. However, if this is a new concept to you, and you have already made startup investments, it is better to do it later than never.
2. Build a strong relationship with the entrepreneur
The great startup investors I know take the initiative to build a relationship with their portfolio entrepreneurs and learn about their motivations. In any long-term relationship, trust and respect are its founding blocks, especially knowing that tough times are likely ahead as the startup moves through the growth phases. A consistent relationship will make it that much easier for the startup to persevere with the right support team cheering them to the finish line.
Founder of Structure Capital and early investor in startups like Uber and Sales Force, Mike Walsh shares that, for him, building a relationship where he is more of “a fellow entrepreneur than an investor” has proven to be the most productive way of establishing an open line of communication. This allows him to quickly understand the real challenges facing the entrepreneurs and join forces in finding solutions.
3. Set communication expectations immediately
An important, but sometimes overlooked practice is ongoing communication between entrepreneurs and investors about notable updates, strategic direction and even challenges. The worst thing an investor can do is distract startups from the normal course of business for an on-demand report of partial or non-existent data because they want it. Successful investors set expectations in the beginning – which means that you can look forward to hearing from the founders on the mutually agreed terms – so that you can stay updated and entrepreneurs can anticipate it with regularity.
Founder of Felicis Ventures and active angel investor, Aydin Senkut, eloquently explains that being helpful when it is needed and where it matters the most should be the focus. He advises investors to “resist the urge to check in with the founders too frequently on what’s going on at the company but be ready to be helpful, especially in areas of one’s own expertise.”
Typically, early-stage startups update their investor base quarterly, but if the founders agree, I recommend updates as often as once a month. With frequent check ins, investors are closer to the operations, giving them an opportunity to contribute value in a timely manner, such as opening doors that might otherwise be out of reach. Updates vary widely, but all of them should address key business indicators in one form or another. Update content can include:
- Status of the company
- Key metrics, including user growth, revenue growth, retention rates, etc.
- Milestones reached, including product launches/shipments, distribution agreement, user base, etc.
- Strategic partnerships, clients, customers, markets, channels, etc.
- Team developments such as new hires, advisors, board members, etc.
- Industry news that impacts the business
- Press mentions
- Speaking engagements, conferences, panels, etc.
- Capital position and runway status
- Identify the challenges and the action plan to overcome them
- Specific actions the startup will take going forward
- Specific actions that investors can take to help the startup achieve goals/overcome challenges
When the entrepreneurs are forthcoming about this information, which is largely based on the nature of your relationship, it allows you to manage your expectations and contribute as much value as you can to help reach success.
Given that startup investments are a long-term journey, and ideally a strategic partnership, it is highly advisable that investors lend themselves as an asset in order to increase the chances of a return on investment.
In speaking with some of the most sophisticated angel investors, there is a common ground of understanding in which setting clear deliverables and expectations from the beginning helps kick off the relationship in the right direction.
Lastly, in addition to the above suggestions, you should be one of the company’s biggest advocates – you should use the company’s product, offer feedback, tell all of your friends, and bring it up at every opportunity. Word of mouth is the best marketing, and as an investor, you are in a perfect position to help multiply the number of potential customers out there.