A couple of weeks ago I did a fireside chat with Alon Grinshpoon, founder and CEO of Echo3D, a CDN and CMS for 3D content in the cloud and a Remagine Ventures portfolio company, as part of an entrepreneurial finance MBA class in Tel Aviv University. We were discussing both sides of the table and the relationship between founders and VCs.
Alon shared the importance of “fit” from the founder side. We often emphasise “product-market fit”, but Alon pointed out two other factors that are essential for success: “founder-market fit” and “founder-investor fit”. Founder-market fit is important as you’re likely to be working on the problem for 7-10 years if you are successful, and this is something that most investors will pay attention to when evaluating your company. And Founder-investor fit can be a huge asset if you manage to find it.
“Founder-investor fit is crucial for a company’s success. A bond between a founder and investor is a commitment for a long term relationship – that’s why it is important to have the right partners on your side. When I first met Eze from Remagine Ventures, it was clear that he shares our company’s vision, understands the market, and cares about our journey as founders. When he provided our team with value-add intros, even before we signed any paperwork, it was beyond the evidence needed for a strong founder-investor fit.”
Alon Grinshpoon, Co-founder and CEO, Echo3D
When all you have is a hammer, everything looks like a nail
When founders (hammers in this case) are fundraising they might rush to email every VC (all nails) they can get in touch with, thinking it’s a numbers game. However, in practice, focusing only on the relevant ones (based on their filtering criteria like geo, stage, sector, etc) is bound to make the fundraising process shorter and more effective. But there’s more to founder-investor fit than criteria filtering for deals.
In VC, when we aren’t supporting our portfolio companies, we are constantly busy trying to finding the next investment. The needle in the haystack. And so a large part of the VCs time is focused on the question ‘who should I invest in’. Equally important though, is the question of why should a founder/ startup take your money. If you agree that the top founders are likely to receive multiple term-sheets, then the importance of founder-investor fit increases. At the core, this is what founder-investor-fit boils down to:
- Personal fit
- Value add
Choose a partner, not just a fund.
In a founder survey conducted by VC fund Creandum (the latest version was published in May 2022), the results show that personal chemistry is the most important factor for founders when partnering with a VC.
While founders are likely to liaise with multiple touch points in the fund post investment, the core relationship is held by the partner leading the deal, who will typically also sit on the company’s board.
So choose your partner wisely. Reference calls on the partner from other portfolio companies or other boards she served are usually recommended. People have different work styles and it’s good to know what to expect in the future.
It’s a matter of trust
People do business with people they trust. Trust is the social glue that holds business relationships together. There are entire academic books and papers (Francis Fukuyama’s “Trust”, Robert Putnam’s “Bowling Alone” amongst the most prolific academics here) dedicated to establishing trust in business and relationships.
In the specific context of startups, I covered the “Trust Pyramid” in my review of Patrick Lencioni’s book ‘the five dysfunctions of a team’. He explains that trust can be built over time, with each action/ conversation, but it can be destroyed very quickly.
How can founders evaluate trust? Knowing that you’re dealing with a partner that has integrity, is capable professionally and is not focused on ego, is a good way to build trust.
3. Value Add
When capital is commoditised, and every VC fund might look the same to a founder, market forces encourage players to differentiate. Imagine we’re all vendors in a food market selling donuts. Sooner or later, one stall is going to start offering different donuts, covered in sprinkles to attract more customers. As the venture capital industry evolves, so do the models for supporting founders.
Value add in Venture Capital can range from full fledged support platforms like GV or A16Z (some include educational courses, help with design thinking, hiring, business development) to Tiger Global’s approach (supply of capital with founder-friendly terms and minimal involvement).
Going back to the Creandum survey, there seems to be a disconnect between what VCs think adds value to founders and what founders actually appreciate. There’s one particular type of help that both founders and VCs agree has a big impact: follow-on fundraising.
“On a positive note, one area both founders and VCs agree that VCs have a significant impact is on follow-on financing. VCs have a natural ability to help founders raise follow-on capital by for example connecting founders with the right people and funds, supporting on preparation materials such as decks and financial plans, and helping craft fundraising strategies.”
“Do VCs add value?”, Creandum
In the case of Echo3D, I didn’t wait for the term sheet to be signed to start providing value. I made intros to potential customers, introduced relevant angels and shared our thoughts on the development of the AR market before the deal was signed.
As we are a thematic fund, we’ve built deep networks and expertise in the areas we cover (gaming, metaverse and consumer tech) are are likely to favour investments where we can provide value-add beyond the money.
How can founders test Founder-investor fit?
When raising your round of funding it’s worth doing a bit of homework before you sign your first term sheet.
- Create a list of potential backers, based on the basic deal filtering criteria (stage, sector, geo, etc) – I covered this in a ‘The Five S’s of VC Deal Filtering’ on Forbes
- Get to know the person you’re partnering with (in and outside of the conference room/Zoom if possible!)
- Ask for references from other founders they backed and didn’t back. If they offer it without you even asking, it’s probably a good sign.
Good luck out there!