Your relationship with your investors is an important one, which means that you need to be quite selective in who you work with. Fortunately, I have a few simple rules that can make this easier, and even if you don’t have multiple investors vying to fund you, these rules still apply.
When you think about fundraising, of course you’d like to get the best price—but I encourage folks not to hyper-optimize for valuation. Remember, fundraising is not success. You’re building a relationship with your investors, one that is hopefully going to go the distance.
Here are my rules of thumb:
It’s about the partner at the firm, not the firm itself
You’re going to spend way more time with your VC partner than you’d ever imagined, so it’s important that you have a good rapport with them.
When I was raising our Series A, a CEO friend told me that he talked to his lead investor every week. At the time, I thought that that was totally wild and unusual… but he was right. It wasn’t obvious to me how close that relationship would be. Three years later, I text with the partner who led our Series A several times a week. I really like him, but it would be deeply annoying to be so connected to him if I didn’t.
On the flip side, when we were raising our most recent round, one of our angels connected us with a well-regarded investor. We wrote to them about how we were excited to work together, and how they were uniquely a good fit for our business, and shared our hopes for a long-term relationship and the productive things we might accomplish together.
His terse two-line reply told us all we needed to know: “Adding [a junior partner] to this thread, who will be driving this deal.” This clearly wasn’t someone who was going to go the distance with us or be a good fit, and in some ways I’m glad that the investor signaled that early.
Make sure they have deep conviction in your team
Everyone is a supportive investor when things are working, but the question is: how will they act when things aren’t working? Will they be in your camp and be helpful and productive, or will they cut their losses and run?
That kind of conviction is way more important than an incremental delta in valuation. As an example, in our second company, one of our earliest investors made very clear to us that he didn’t like the business idea at all—but was a huge fan of the team and knew we’d figure something out—and wrote us a check.
As a more recent example: at Pilot, gross margin is an important metric that we track. It’s one we’ve made great progress on, but it’s been a journey to improve it. Importantly, we needed to improve margins in a way that was actually good for the user experience. Our investors have conviction in our team, and said “Yes, we understand that it’s going to take time, but we trust you to do it the right way.” If they’d instead said “No, pull all the levers to get gross margin to X% right now,” it would have been incredibly harmful to the company.
Find someone willing to do the work
When you need help, will your investor hustle on your behalf? If you have a request, will they promptly follow through on it?
Your best investors will pound the pavement for you. When we were launching Pilot, our early investors made tons of customer intros for us, in a way that was incredibly valuable. Running a startup is hard, and you need all the help you can get.
If your potential investor isn’t willing to do the work, you may be better served by working with someone else. Incidentally, there seems to be a (loose) inverse correlation between how famous an investor is and how much they’re willing to do for you. It seems that once you’ve made it, you’d rather spend your time skiing than helping your portfolio companies. So don’t get too distracted by big names—and don’t underestimate how valuable a scrappier, hungrier, less-established investor might be.
Audition them when possible
Ideally, you audition your investors—can you dry-run the experience in some way? For example: while our seed round was mostly composed of angel investors, we also took some money from three VC firms. The idea here was: we anticipated wanting one of these firms to do the Series A, and by trying them out now, we could get a read on what it’d be like to work with them before having to make a decision.
In particular, if the investor isn’t helpful when they are courting you, they definitely aren’t going to be helpful when the investment is actually made (or when things aren’t going well.)
If you don't have the ability to do a test run, do the same due diligence you’d do with your angel investors. Talk to people they invest in or are on the board of and pay attention to your interactions. Sooner or later, people will show you their true colors and you can make a clear choice.