In the folklore of startup fundraising, there are a few opinions on the importance of finding the “right” investors.
One take is that all investors (venture capitalists or angels) brand themselves as “value-add investors.” Almost none of them are, so who cares what investor you bring on? Get the best terms, get the most money, and maybe the best name. Take the money, ensure that they can’t meddle too much, and run your company.
Another take is that the right investor makes or breaks your company. It’s a long-term partnership; a good match can supercharge your company, and a bad one can completely sink your prospects for scaling and future fundraising.
So, which take is right? Both. Now, which is more true for you depends.
Investors cannot substitute for you or your team
The idea that “investors are just money” has some truth when you consider that investors cannot run your business for you.
The best investor in the world cannot save your startup if you don’t build and execute well. An investor can help guide you, but even extremely active investors (such as Creative Ventures) are not truly part of your day-to-day team. Those who claim they are part of your team are either lying to you or will be extremely annoying micromanagers/backseat drivers.
At the end of the day, even highly concentrated professional startup investors have more than one portfolio company. Their attention is divided. Some investors (known as “venture builders”) do build startups from scratch, but even these investors ultimately hire executives to run their startup’s day-to-day after the initial setup.
A good investor is not a substitute for excellent founders and teams.
A good investor adds knowledge and focus
One massive pet peeve of mine is VCs who proudly claim that they “listen to founders attentively” as a way to learn everything about a startup and follow the founders’ lead. If that’s how they operate, the VCs are basically intelligent parrots with money who can tell you what you already know—because you told them everything they know now.
A good investor should know more than you about certain things. For example:
– What pitfalls do startups in my industry face in go-to-market?
– What does my next fundraising round look like compared to similar companies?
– What should I focus on in order to maximize my next round’s success?
A good investor with experience in your industry should know these things. Additionally, venture firms who have a lot of experience in your particular vertical should be able to teach you a lot about your market. You have other things to worry about like managing co-founder dynamics, company culture, hiring, customers, etc. A specialist VC in your vertical is thinking about and observing your market as a full-time job.
With all of this knowledge, a competent investor can set you up for success for your next round, which is fundamental for maximizing your ability to raise money and progress your startup (which I wrote an entire article about here. Additionally, as an informed, outside observer with a vested interest in your success, a competent investor can also give continuous high-level guidance on the most important things for you to focus on. This makes them a good sounding board on the right things to prioritize or not and hard problems—which, by the way, is the primary function of a Board of Directors…which competent investors can also serve on.
Bad investors will destroy you
Your lead investor last round is telling everyone how terrible your startup is and how you are basically a liar. How well do you think your next fundraising round is going to go?
This is the kind of horror story you hear about bad investors, but the situation doesn’t have to be quite that extreme to cause a significant amount of damage. A bad investor can do everything that a good investor does, it’s just that their advice, suggestions, or even demands will be unreasonable and unproductive.
At best, bad investors with uninformed opinions can be a distraction. At worst, in order to satisfy your bad investors enough to put in more money or vouch for you in the next round, you may need to do things that are long-term negative to your business’s prospects. They can micromanage and take up all your time giving you inane, stupid advice. They could also become impossible to contact after disappearing for long stretches of time only to come roaring back in like a tornado, blowing up your phone and email with demands to know what is happening, why certain things didn’t happen, and what you’re going to do (and threatening lawsuits, telling everyone how terrible you are, etc.).
As Tolstoy once wrote, “Good families are all the same. Bad families are all unique in their own ways.” Good investors are easier to describe because they tend to share many similar characteristics, and yet, I’m still discovering the wide variety of flavors of bad investors.
So do you need good investors?
Again, it depends. Certain types of startups need more guidance than others. In the case of specialist startups in healthcare or deep tech—or simply startups with first-time founders—it’s often valuable to ensure that you have competent investors (and I intentionally avoid the term “value-add” here because the term is overused and something every investor claims).
That being said, building your startup and having a firm grasp of fundamentals (product-market fit, go-to-market, customers, hiring) is more important than what investors you bring on. There is a limit to the impact that competent investors can make. Still, you should vet investors and avoid bad ones at all costs.
At best, bad investors are a distraction. At worst, they can single-handedly kill your startup. With so many challenges you have to overcome in the world of startups, why add one that you can easily avoid?