Strategic Investors and Value from Your Cap Table

image of characteristics of venture capital

Investors play a critical role in the venture ecosystem. Deploying capital based on the assessed potential of early-stage companies is elemental to the development of new ideas, products, platforms, and technologies. Even so, many startups expect investors to play a much bigger role than simply providing essential funding.

Here’s a question for you entrepreneurs: when raising capital, how would you describe your ideal investor? Is it strictly the person or firm who can provide an investment fastest or with the most favorable terms?

We would guess that, for at least part of your cap table, you aim to include investors who can be strategic. Those whose networks you can leverage, and whose expertise you can lean on when facing the inevitable challenges of growth. We know that some of the best investors in the market play that role and play it well. But we also see instances where companies are disappointed by the lack of partnership offered by investors who claim to provide value other than just money. In this article we take a closer look at where expectations between investors and entrepreneurs can be mismatched, and where explicit communication and thoughtful strategies in building your cap table can alleviate these pressures.

The Startup Perspective

Why do founders seek investors who can double as strategic advisors? This may seem obvious in some respects, but let’s break down some of the specifics and nuances.

Expertise. Investors typically have unparalleled experience regarding operating an early-stage business. Many Angels and VCs are former entrepreneurs themselves and have stewarded dozens of their investments through the most challenging phases of growth. To first-time founders and founding teams, this expertise can be invaluable. Whether through board participation or informal involvement, it is easy to imagine how a tenured investor can help keep you on the right track.

Network. Investors’ personal and professional networks are another key selling point. Investor networks often include executives at large potential customers, go-to-market partners, and other investors who can bring in additional capital. For entrepreneurs with a limited network and limited time to build it, a well-connected investor can feel like the missing puzzle piece.

Validation. Finally, landing a highly successful and respected investor can be a mark of validation for a new venture. Prospective users may see buy-in from a top investor as a strong endorsement of your product or service. Later-round investors may also look to your initial cap table as a means to better validate your business’s potential.

The Investor Perspective

Many investors recognize the value they bring to early-stage companies beyond funding alone. They see their know-how and networks as differentiators to both win deals and help grow their portfolio companies. However, startups often fail to recognize that any investor has a multitude of demands on their time and attention. Consider this: according to FundersClub, the average VC fund is spread across 30 to 80 startups, and serving as a Directors or Advisors to their portfolio companies comprises only a portion of VC partners’ time. They are constantly focused on sourcing new investments, developing LP relationships and/or raising their next fund, executing exits with existing portfolio companies, and managing the day-to-day activities of their firms. 

It is important to understand an investor’s strategic role in context – investors want to add additional value for entrepreneurs when it helps maximize their return AND when they have the availability to do so. They aim to provide impactful guidance at key inflection points, make a handful of targeted introductions, and offer a stamp of approval that a founder can leverage in the marketplace. This is not a critique of investors’ willingness to help, it’s more of  an observational fact. To spend an outsized amount of time on a single portfolio company would require the abandonment of other equally, if not more, important responsibilities, not to mention the potential ramifications of materially favoring and supporting one portfolio company over another.

Addressing the Disconnect

photo of an investor partnership

When you consider the perspectives above, the potential for disconnect between entrepreneurs and investors is clear. Startups often seek investors that can play a considerable strategic role, and investors have limited capacity to play that role for multiple portfolio companies simultaneously. It’s not a dig at either side, it’s simply the nature of each party’s respective position.

So, founders, when you’re seeking your next VC or private investor, are you going to seek out someone who can bring more than capital to the table? We think you should, but here are a few ideas for how to align your needs and expectations so you can maximize the effectiveness of those on your cap table.

1) Make a plan to build your network of advisors and be thoughtful about where investors fit into that network, keeping in mind how they may be impactful later down the road. As your company progresses, you’ll eventually form a Board of Directors composed primarily of members of the founding team and major investors. Since board members will help set the direction for your company, you want to make sure that you have solid pre-existing relationships with all investors who may eventually be granted a seat. Adding lead investors to a Board of Directors is more-or-less inevitable and typically a board seat will be included in the investment terms you’ll receive. However, if you’re considering carving out a Board seat for an Advisor or minority investor, our recommendation would be to only bring on anyone who has already proven their value.

2) Communicate your goals for the investor relationship and where you envision their help playing a critical role. Identify specific companies or individuals in the investor’s network that you aspire to get in front of, or offer guidelines around the types of introductions you hope they can make. Try to focus on where an investor can make the biggest impact while minimizing the demand on their time.

3) Be realistic about the validation that comes from a specific investor relationship. Some investors’ track records may stand out, but no investor has entirely avoided making mistakes – investors are only human after all. Your product or service must be able to stand on its own; backing by a great investor can be a powerful marketing tool but it can never replace a proven product-market fit.

In a way, Bizydev, by nature of what we do, is better positioned to be the hands-on strategic partner that entrepreneurs often seek in an investor. We recognize better than anyone the value of a partner who can immediately understand your business and get you in front of the right opportunities at exactly the right time. We also recognize better than anyone how much time, commitment, thought, and effort it takes to play that role effectively for multiple startups concurrently. Communicate directly with your potential investors about how big of a strategic role they can play and you’ll build much more rewarding relationships in your cap table. And if you find yourself in need of a business development partner who is focused on going the extra mile to bring you industry expertise, a vast network, and a strategic helping hand, you can always drop us a line.