Nirvana is found in Transparency
Know what you are fishing for…
Following the recent meme on sources of seed funds with contributions from Chris Dixon, Charlie O’Donnell, Mark Suster and Brad Feld and the related topic of We need to own baloney from Fred Wilson and Josh Kopelman has reminded me of some advice I got after my first company failed.
A good friend and the founder of AND 1 told me you get to make three choices as an entrepreneur:
You get to choose your idea
You get to choose your business partners
You get to choose your investors
I happened to be one for three because I did not invest the time to do more than a cursory reference check on my business partner and my investors. Everything that I discovered as my business disintegrated, was discoverable prior to building and funding my business. I just didn’t ask the questions.
There is no recipe for success in these choices, but learning as much as you can about your prospects is a good start.
To be clear, when you decide to take on outside investment, you are bringing a new partner into your business. Their business model and approach will have a significant impact on your business, your strategies and your prospects for success. No matter how many times Fred “calls bullshit” on VC’s who say they “need to own x percent,” fund math is real and there will always be investors who push out value added syndicate partners in order to “own enough” even though they hurt the entrepreneur (and the business — including their investment) in the process.
Mark and Brad offer excellent perspective on seed investing in their posts (links above). The type of questions Brad encourages founders to ask of their investors and the diligence Mark recommends (including contacting existing portfolio CEO’s) are exactly right and I wish I had this advice years ago. This process is difficult, but crucial because for each entrepreneur, there is a different ideal investor. For some, taking seed money from a large fund and the “freedom” that comes with a passive investment may be ideal. For others an extremely active angel who does not plan to participate in later financing may be a perfect source of guidance and capital. For many the balance lies somewhere in between and future participation is based on meeting specific milestones that should be well understood by both sides of the table.
I don’t believe is possible to say one funding path is superior to another, but I do believe your choice of funding is one of the most important decisions you will make and you should know what you are signing up for prior to signing the term sheet. Investors should be chosen based on their alignment with your interests and vision for the company. It is critical to understand the investor’s expectations and ability to assist you in living up to these expectations prior to accepting funding and allowing them to join you as a partner. You should ask each investor you meet with to articulate their investment model, their ability to add value to your business and force them to pitch you on accepting their money and their advice. Similar to choosing your business partners, complete reference checks and look at their past actions in both successes and failures. If you sense that you do not share a vision or an approach to managing your business, as hard as it is, keep looking for other sources of funding.