When launching a new company, selecting investors to help with raising funds is top of mind for many founders. But whether you begin by bootstrapping your venture in its initial years like we did at Pluralsight or seek outside financing sooner, it's critical to know what you're looking for when you choose a VC partner.
When you're ready for outside funding, it can be tempting to choose an investor based solely on who brings the most cash to the table, without considering other factors. Yet it's important to remember that your VCs will likely be sitting on your board, impacting the DNA of your company--so finding the right match can be even more important in the long run than the deal terms.
Here are three points to help guide your decision-making process when identifying the best VC partner for your startup stage and beyond:
Pick partners as though you're hiring them. When recruiting talent for staff positions, it's strategic to always select candidates who reflect your company's core values. That's because when you base your hiring decisions on finding employees who already embody the qualities that are most important to your organization, you'll ensure that you're assembling a group that's in alignment with your vision and values.
The same principle holds true for finding VC partners--they should reflect the tightest cultural fit you can find. Your partners should mirror your company's core values first and foremost, so you should evaluate their candidacy the same way you would with a potential new hire, eliminating any suitors who fail this initial litmus test. Start with the end in mind by looking not just at the financial terms and construct, but at whether the VC partner exhibits the traits you want to help guide your company from a board seat.
A good example of how we've approached this at Pluralsight is our company's decision announced this week to take on two additional investors--Felicis Ventures founded by Aydin Senkut, and GSV Advisors founded by Deborah Quazzo--for a Series B add-on. While we had already raised $135 million in our Series B round last summer, we decided to make room for two more investors in large part because they aligned perfectly with our core values and culture. Senkut believed so strongly in our company's vision that he wrote to me personally after the Series B to tell me how much he still wanted to support us even though he wasn't included in the initial funding round. And Quazzo's broker dealer not only specializes in advising education companies but also co-hosts an annual Education Innovation Summit in Scotsdale, AZ, with Arizona State University that celebrates innovations and innovators across the education landscape--both missions that reflect our core belief in the importance of democratizing professional learning.
Consider board composition. The choice of VC partners has ramifications that stretch far beyond the immediate funding of your enterprise, since VCs generally also become board members. With that in mind, you'll want to pick investors who appear likely to add significant value to your board. This is why it's so important to base your choice on more than a firm's reputation; the individuals who will sit on your board are much more crucial in the end.
Since you're looking for partners who believe in your company's mission strongly enough to stick with you over time, you should take the personalities of potential VC board members into account. In addition to supporting your stated core values, seek partners who show integrity, inspire trust, and communicate clearly with you and your leadership team throughout the entire process. If you see red flags in any of these areas, it's wise to move on to other options.
As with hiring employees, you should spend as much time as possible with potential board members and might consider getting out of the boardroom and into some real-life scenarios. This will provide a more tangible way to evaluate the potential working relationship, while highlighting whether or not they fully embody your company's core values.
Think Zappos. An effective way to think about the type of VC partner you're looking for is to clearly understand what you stand for. Online retailer Zappos, for example, has become synonymous with over-delivering on customer satisfaction. Under the leadership of CEO Tony Hsieh, author of Delivering Happiness: A Path to Profits, Passion, and Purpose, Zappos' "customer-first culture" means that performance on the customer service team is evaluated based on how well employees are able to create positive, memorable experiences for customers.
If Zappos were hiring a VC partner, they'd no doubt want to find one that shared this penchant for making the customer's day, since this is what creates a point of differentiation for the company and helps make it successful. What's your Zappos? Think about the common themes that really make your business stand out as a winner, and make sure your VC partners share this passion.
While it may not initially feel like a deal-breaker if a potential investor fails to show this commitment to the mission, screening for this level of enthusiasm will help you see what kind of board member they're likely to make, and whether they'll still be there for you when the going gets tough. Over the long haul, this is much more important to your company's success than the signing terms.