Article by Ekaterina Almasque, General Partner at OpenOcean
Investment from a VC fund is fundamental for many start-ups. However, even with this added financial support, not all businesses are successful.
Figures from Harvard Business School show that as many as 75% of VC-backed companies never return cash to investors.
To build a successful VC-founder relationship, I believe there are five components:
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Set expectations early on
Before reaching any kind of agreement, the investor and founder must establish the terms of the relationship. For VCs, this involves pitching a plan to best leverage their investment to founders, putting forward a vision for the company in the future, and what guidance and support they can provide along the way. Equally, the founder must be transparent about what they are looking for in an investor to avoid any unavoidable obstacles later on.
In the tech sector, founders need to find a VC with experience and expertise to understand their offering and deliver meaningful value to the business. Seeking out capital at the expense of the specific capabilities or technological know-how required is, unfortunately, a common mistake for many founders of tech start-ups.
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Establish trust
Founders should see their investor as a trusted advisor. Investors have the experience they’ve gained throughout their career and other companies in their portfolio to advise founders on the best way forward.
When VC investment comes in, early stage start-ups in particular can scale up at pace, facing new challenges every day: recruitment, selecting partners and suppliers, deciding which markets to expand into, the list goes on. An investor will seek to fill any gaps in this period, answering questions, making introductions, and generally providing support as the business grows.
Throughout my time as a VC, I have learned that founders value belief above all else. Taking a start-up to unicorn status is a sizable task, and it requires a VC who understands the difficulties and is prepared to boost founders’ confidence with a steady hand.
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Grow together
As a founder, who is often synonymous with the business, it may be tough to trust a new investor and if not properly managed, this situation could generate tension and hostility when investors suggest alternative routes or question decisions made.
Instead, founders must recognise that investors have a legitimate interest in seeing the business succeed and remain open to any insights offered. Scaling a business is very different from starting one, and difficult choices will need to be made. If a founder’s rigid attachment to their original vision causes them to be unwilling when listening to others, it could put the firm’s chance of success at risk.
Many in the industry liken the best founder-investor relationships to that of an athlete and a coach. The athlete is the star, bringing the talent, passion, and inspiration to keep everyone motivated. The coach is the secret to success, supporting the athlete in developing their career through providing the counsel they need to prosper.
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Work on the relationship
Like any relationship, founders and VCs need to invest time and effort into nurturing their partnership.
In the case of OpenOcean’s investment in quantum firm IQM, it was the culmination of discussions over a long period, starting with informal discussions and building towards an eventual agreement to invest. By putting in this time, we built up a strong understanding of the organisation and established an effective plan for how VC investment could help ensure the long-term success of the firm.
Similarly, regular and honest communication is essential. In my work with the founders of hyperconverged infrastructure firm Sunlight.io, we used weekly meetings and informal catch-ups to get to grips with what the company was building and how our investment could help them.
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VC industry expertise
The last and perhaps most important ingredient of founder-VC success is sector experience. The technology industry is changing beyond all recognition, with advanced technologies creating new opportunities for innovation across all industries.
VCs need in-depth knowledge of the industry they’re investing in if they are to provide impactful counsel for founders. Ideally, this expertise comes from experience as a founder, gifting them proven credibility when guiding new founders.
Final thoughts
To close this article, I’d like to address the lack of diversity within the VC industry. According to the Global VC Report 2020, the industry reached an all-time high of $300 billion in venture funding in 2020, and yet only 2.3% of VC funding went to women-led start-ups. Combined with other pandemic-induced backsliding in the way of gender equality, these figures are a major cause for concern.
As we are aware, diversity in the workplace is linked to greater productivity and better decision-making, but gender diversity in particular leads to more innovation – a key attribute of a successful founder.
Unfortunately, the VC industry itself has somewhat of a ‘boys club’ notion associated with it, and this outdated perception of the industry has slowed the influx of women into the sector. However, to resolve this issue we must transform our thinking as investors to minimise the influence of unconscious bias and instead, be open to the fantastic opportunities being presented to us, regardless of gender, age, race, or any other factor.
If investors can follow this model of investment, we can reach the future we all want: an industry that backs and supports the ambitions of talented and driven founders – irrespective of who they are.
