7 Observations from a Venture Partner

Charlie Lambropoulos

I have been an entrepreneur and operator for the past 20 years and more recently have crossed the rubicon to professional early-stage venture investing.  This has added a totally new dimension to my perspective when it comes to thinking about startups.  I’ve made a fair share of angel investments over the years, but consistently sitting on this side of the table on diligence and pitch calls has given me a much greater appreciation for the operational, financial and interpersonal considerations of an investment firm.  I wanted to share 7 things that I wish all founders knew (including myself) about institutional investors.

1. It’s better for a founder to be fully transparent upfront about what parts of your business are going well and what parts are not yet solved (or even having challenges).  Most investors are smart people and find it very irritating if you speak like a politician when asked pointed questions about a certain area of your business.  Laying your cards on the table upfront is always better than hiding something only to be discovered later.  It’s sort of like putting a very outdated picture on a dating website and then hoping to win people over with your personality after they meet you.  It doesn’t work…neither does hiding challenges or skeletons.  Candor is much appreciated and it’s a great signal that after a check is written, you’ll be a great founder to work with.  Trust starts from the first meeting.  Also it’s just generally annoying to feel like someone is bullshittng you.

2. Be prepared to show, not tell.  There is nothing more compelling than a founder who can articulate and show organized and clear processes & data about the key drivers of their business (sales pipelines, marketing performance trackers, product usage metrics, etc).  A command of these metrics with empirical support instills a lot of confidence.  Showing you have both the ability to tell a great narrative AND be analytical is a highly impressive and rare combination of skills. 

3. Don’t be defensive.  This might be the most important observation of all.  The fact of the matter is early stage investing is hard, the investor inherently is operating in a domain with high levels of uncertainty and asking very specific and pointed questions is one of the most straightforward ways to reduce uncertainty.  Don’t take these types of questions as a criticism of your business but as an opportunity to start building a transparent relationship with someone who might become a long-term partner.  Being thoughtful and honest rather than evasive about hard questions (even if the answer isn’t that positive for now) is another signal that you have enough self-confidence to acknowledge when things aren’t totally figured out and are willing to collaborate.  I deeply understand how hard it is to be a founder and how annoying it can feel to have someone peppering you with questions who isn’t “in the arena themselves”…and also the sentiment “if this is so obvious…why don’t you just do it yourself.”  BUT the fact is a venture investor also has their own LPs to answer to and whose money they have been entrusted with…so it would be crazy if they DIDN’T ask a million questions.  Everyone has someone they need to answer to.

4. A lot of founders don’t have a deep understanding of the venture capital business model nor are they often aware (or just have not spent much time considering) that the VC also has a lot of investors of its own (their limited partners).  Early stage VCs need to swing for big outcomes to make the math work given the high odds of failure and also for it to be a sensible asset class for LPs to invest in.  If a VC firm wants to generate a 5x DPI (cash return) to its LPs, it needs a few investments to knock it out of the park.  That means, unfortunately, there are a lot of good businesses that might be able to grow sustainably to $5-10M of revenue that aren’t a fit for this type of investment model.  If you are considering raising venture capital, ask yourself if there is a credible path to a 50-100x return from where you are today.  In spite of the “thesis de jour” driven by the economic moment in the world at any given time…you can partially ignore whatever any venture investor is saying to you about what criteria they are looking for and just overlay the subtitle “growth growth growth”.  Lately, it seems fashionable to talk more about profitability and sustainability…and trust me…as a founder myself, I can appreciate both of those things…but without a path to fast growth, no matter what anyone preaches, most venture investors will be skeptical of any company without a clear growth story.  There is a big difference between a company with $1M EBITDA, $5M annual revenue and growing at 10% per year vs one focused on growing at 100% per year whether profitable or not to a venture investor (and if they can do that profitably…they are a true unicorn).  The first company profile is amazing…it’s just not meant for venture capital.

5. One of the most challenging things about being a venture investor for me so far has been related to getting founders to fully trust me and open up.  Founders are often inherently skeptical of investors (I was too) and I am still finding my way on this one.  Prior to becoming an “investor”, I was always “another founder” in the eyes of founders I’ve worked with or advised and this led to a more natural and high level of trust and comfort opening up about business challenges and the emotional tolls of running a startup, since for better or worse, I’ve been there myself (and when it comes to my hairline…it’s mostly for worse).  Once you become an “investor”, it seems like barriers immediately go up.  One of my primary goals is understanding how to eliminate this fear in anyone talking to me in my capacity as an “investor”.  I don’t judge anyone for failing or not figuring out a hard business problem right away.  I know how hard it is.  I also know how aggravating it can be to have a smug 23-year-old associate who has never done anything operational themselves “evaluating you”.  I hope to be the complete opposite of whatever that feeling produces.

6. Just because an investor passes on investing in your company does not mean they think you are incompetent or a loser.  There can be a lot of reasons it’s not the right fit or timing.  Try not to take it personally (even though this can be so hard).

7. It’s a lot easier to have conviction on an investment in a person you’ve built a relationship with.  Consistent updates and keeping prospective investors in the loop is really helpful.  It’s also a good forcing function to make sure you are tracking and aggregating key metrics at least on a monthly cadence.

In spite of the fact that the venture capital community is largely focused on investing in sophisticated technology and innovative ideas, it’s become glaringly clear to me this is a business about people, reputation and empathy.  The best founders drive the best returns.  And how do you get the best founders to want to work with you?  Be honest, trustworthy, helpful—and build a reputation for being this way.  

When you break down the VC business to its core operational elements (besides getting LPs their K1s on time…also very important!):  1) sourcing, 2) diligence, 3) portfolio support…the underlying principle of be helpful, be humble, be curious and “don’t be an asshole” is the most powerful “implementation” strategy at every phase of this cycle.  That will drive more “shareholder value” than making asinine abstract pseudo-profound statements on a panel like “money isn’t money…it’s really just value communication…and we see this union of mobility and fiat as a really important convergence that’s going to lead to new forms of emotional commerce.”

To paraphrase Bill Clinton, “it’s the people, stupid”…and this goes both ways.  If you don’t feel comfortable being honest with an investor, they are probably the wrong investor for you…and if I can’t feel comfortable that you are being honest with me, I’ll probably not be comfortable investing.  This matters more than anything else because it’s a marriage not a transaction.  I realize this is easier said than done when you really need money and it’s not like everyone in the world is begging to write you a check.

Anyway—it’s awesome to meet so many founders and learn about all of these businesses.  What a privilege.