There’s a wide spectrum of support that an investor can provide a startup. At one extreme, we can provide capital without any interference. At the other extreme, we can effectively serve as core team members, helping with everything from building the team to designing the product to identifying and building out distribution channels to raising future funding to structuring an exit.
However, based on my experiences, there are 4 specific types of support that great startups can benefit from:
Identifying and helping recruit/transition team members
Thinking of and helping structure partnerships with other companies
Preparing for and raising future funding
Structuring an exit
There are also certain types of support that, if an investor finds themself giving a company, are usually an indication that things aren’t going well:
Designing and providing feedback on product
Identifying, building out, and measuring the return of different distribution channels
What’s common across the 4 types of support that great startups can benefit from is that they’re external activities. Specifically, they’re about connecting the startup with external talent, companies, and financing opportunities.
What’s common across the types of support that great startups don’t need is that they’re internal activities. Specifically, they’re activities that require detailed immersion to do well. As such, great startups do it themselves. So if an investor finds themself being requested to or feeling the need to contribute in these areas, that’s often a negative signal.
The corollary to this analysis is that you should invest in startups who either don’t need you, or benefit from your support in external activities. You shouldn’t invest in startups who need you to perform their internal activities.
I was recently speaking with the co-founder of a successful regional tech business. We’re not investors in the company, and the co-founder was looking for insights into the Turkish market.
In the middle of the discussion, I was caught by surprise when the co-founder asked whether I’d like to join the company. This is the first time that I’ve been on the receiving end of a startup co-founder offering an investor a job.
I like investing too much to make the shift, so I politely declined.
However, the anecdote is a great reminder that great founders are always recruiting.
I was recently speaking with another investor about how successful our companies are at recruiting.
At the surface, one might expect a company’s recruiting success to be tied to the strength of their brand and the financial offer they make to candidates. Traction is a pretty good proxy for the former and the combination of profitability (or a lower net burn rate) and funding are good proxies for the latter. And this is indeed broadly the case. Companies with more traction and a better net funding position are more successful at recruiting.
However, during our talk we also identified several outliers in our portfolios. Specifically, some companies were punching well above their weight by attracting a level of talent that’s difficult to justify by looking only at their traction and net funding position. So there must be at least one, or perhaps more, variables that we’re missing. I think there are two.
The first is the founder’s ability to inspire others to join them in the pursuit of a shared vision. This comes from being authentic, being able to clearly communicate your vision, and caring about the people you work with.
The second is how much time the founder spends recruiting. All else equal, the more time you spend meeting candidates the more likely you are to hire the right people. Together with setting the company’s vision and keeping it funded, recruiting is one of the three most important responsibilities of a startup founder. And some founders have internalized this more than others.
Your traction and net funding position determine your weight when recruiting. Your ability to communicate your vision in a way that inspires others and the time that you dedicate to recruiting let you punch above your weight.