Of course you put your best foot forward when courting investment. But there are good reasons to be a bit more transparent, too.
I suppose it’s only natural for an entrepreneur to be a little nervous before meeting with a potential backer for his or her company. But the result of that nervousness, often, comes off as fairly unnatural.
Many times, when entrepreneurs begin meeting with investment partners, they feel inclined to display a certain bravado that they think conveys confidence -- confidence they don’t necessarily have. The hope, I suppose, is that doing so will maximize their valuations.
The reality, however, is that most VC firms are made up of former entrepreneurs who are empathetic to the development that first-time founders naturally go through as they build their companies. And, contrary to popular belief, we’re often open to, and excited about, helping advance that development.
That help often takes the form of operational value-add services aimed at helping a company build and execute certain initiatives more efficiently. These are often initiatives that are critical if a company wants to scale successfully. For the most part, such help is offered in the context of collaboration, not dictatorship.
Why Pre-Investment Transparency is Critical
Of course, forging a collaborative investor-investee relationship requires entrepreneurs willing to ask for help and investors willing to provide it.
Truthfully, no entrepreneur, nor the VCs who invest in them, knows everything. But that doesn’t mean it’s a good idea to create a false image to the contrary when you’re courting investors, or to choose a hands-off VC just for the sake of avoiding an operational takeover.
Instead, I always advise entrepreneurs to simply be themselves during pre-investment meetings with potential VC partners. Reveal your strengths and weaknesses, and be very open about where you will -- and won’t -- need their help. That transparency is critical for several reasons:
• It will create an environment of trust and collaboration • It allows your investors to focus their energy on the operational areas in which they can add the most value • It forces everyone to put their cards on the table and opens critical lines of communication that will be necessary post-investment
Once an investment is made, a company and its VC become symbiotically connected, and both parties must be willing to work together to achieve a shared set of goals and aspirations.
In that way, partnering with a VC who’s capable of providing insight and expertise can be hugely valuable. The more your VC is aligned with your vision and engaged in executing initiatives that will help you achieve it, the better your chances are of deriving value when and how you need it.
Pre-investment transparency is also critical to weeding out investors that aren’t a cultural fit for your business. By engaging potential VCs in operational and value-add discussions, you can acquire a better understanding of how each investor thinks and how they might help.
How Much Help Do You Really Need?
The answer to that question depends on your company’s needs, skills gaps, and goals, and no one understands those things better than you.
That’s why it’s critical to proactively engage your VC as you run into issues. Even if your investor can’t help you, he or she will at least be aware of your problem and might be able to find the help you need externally. Revealing problems as they happen also keeps your VC in the loop and mitigates the painful experience of blindsiding your investors with months-old bad news.
It’s also perfectly acceptable to let VCs know when they are overstepping their bounds. Doing so establishes critical parameters, encourages VCs to re-focus or preserve their energy, and allows you to leverage your investor’s expertise only when it’s needed most.
A VC is Not Just a Rolodex
When entrepreneurs accept an investment from a VC, they very often do so hoping to tap into that investor’s network. What founders need to realize, however, is that the value of a Rolodex is short-lived, and it tends to be at its apex in the first year of an investment.
After that, the ripple effect begins to fade. And, if you chose a venture firm based solely on the breadth of its network -; failing to consider the additional value that investor could bring and its cultural alignment with your business -; you may regret ever signing your term sheet.
That’s especially going to be true if your VC begins to ignore you or starts to second-guess every decision you make.