How should you choose your investing partner?
As every entrepreneur knows, the key to building a successful business is building a great team. And just as important as building a management team is attracting the right “team” of investors. You can and will change management along the way. You probably won’t change investors.
Most growth stage companies have multiple investors, joining at different times. Like a life partner, you want investors who are different but not too different. Mixing VCs, hedge funds, corporate VCs and debt investors can prove a challenge. Investors come in all shapes and sizes. As with management, high quality investors with experience and the right expectations are a good thing.
At Frog Capital, we choose our investor syndicate partners carefully. We look for evidence of three themes: similar values and goals; rational behaviour in a crisis; and a balance of optimism and rigour.
We then reference them thoroughly.
At Frog, our values are commitment, clarity, proactivity, insight, teamwork and character. Being clear about what our values are helps others understand us, and us to gauge others. Values underpin behaviour. For example, we favour clarity and openness on differences of opinion so we can talk it out, rather than deferring material matters. Others favour more diplomacy.
With a good fit on values, it is then crucial to have similar goals. At the start of an investment, everyone’s goals are usually aligned. But after time, they will inevitably change. Recognising this change is the number one step. It is the board, chairman and investors’ responsibilities to check in continually (at least annually) and discuss how each investor’s goals may be changing. Is an exit of £100m a good result, or are we shooting for £500m or more? Does someone need to exit sooner than others?
Crises. There is always some form of crisis during the lifetime of growth companies. Referencing how your investing partners have reacted with previous companies will speak volumes about how your partnership will unfold. You learn a great deal about someone’s values during a crisis. And the market will learn a great deal about you.
From Frog’s perspective, being an active, effective shareholder is about blending optimism and rigour. Being positive, ambitious and constructive about the future of a business is an important core. The best investors blend these attributes with an ability to advise, nudge and actively challenge based on many years of experience.
Building the investor team is done over multiple rounds of funding. Each round is a complex project and needs to be treated as such. If you’re going to spend more cash than you receive on a monthly basis, you need to treat fundraising and building your investor team as one of your core skillsets. Be proactive and thoroughly assess each potential investor.
Investment capacity should also be on your mind. High growth shareholders should be factoring their future investment capacity for further investment rounds. “What reserve are you holding?” is a good question to ask. Experienced investors will be reviewing their reserve positions on a quarterly basis.
Our advice in a nutshell: understand better what kind of partner you are to work with, seek to understand the values that drive the behaviour of your (potential) partners, and check in more regularly about each of your goals.