Choosing an investor, the individual and the institution
These days entrepreneurs have a lot of choice when it comes to sources of capital and this is great. As we head into summer, my Tan Test is relevant again, but over the past week two guys that I respect a ton have written about the impact and importance of investment partners and syndicate composition for a start-up. Rodger, from IA Ventures, focuses on how to make the choice and Rob, from NextView, the likely result of different syndicate partners. Both posts are worth reading
and if you have not, you should.
I believe choosing the right source of capital all comes down to the two parts of every e-mail address: the letters before the @ and the letters after the @. The letters before the @ identify an individual. The letters after the @ represent an institution. From my experience raising money as an entrepreneur and working to help entrepreneurs think through funding options in my role at First Round, finding alignment with the letters before AND after the @ is critical when it comes to choice of investors.
This choice will have a dramatic impact on the trajectory of your business and with so many options available here are two mistakes to watch out for:
Over estimating the individual’s ability to move the institution
Over estimating the value of the institution relative to the individual
In the first case, you fall in love with the perfect individual. They have all the things you are looking for and even though your company does not fit the core model of the institution, you discount this because you believe the individual will support you as an exception or, even worse, because the individual is leading a new direction or initiative within the institution. I have found that it is really hard for an individual to move an institution and ultimately, no matter how strong the letters before the @, the individual will fall back to focus on the core business of her firm.
In the second case, the individual is not a great fit for you, but the institution has a fantastic brand and your company is core to what they do in terms of stage, industry and approach. You discount the short-comings of the individual in order to be associated with the institution. This is a challenge because even the best platforms often require an individual to activate them. If the letters before the @ create friction rather than removing it, you will struggle to capture maximum value from even the best institutions.
Investors are looking for outliers, but at the start of a partnership, founders should find a comfortable place in the fat middle of what the institution and the individual do day in and day out. The founder’s job is to find an individual investor that shares their vision, has experience or expertise that will add a unique perspective and who can activate a network that will accelerate the company’s path to success. However, as a founder, you also need to understand the institutional business model. In the end, it is up to you to make sure that the letters after the @ represent an institution built to enable the letters before the @ to deliver given your stage, sector and needs.