Month: July 2014

Strategic Investors Are Back. How Should You Engage?

chess figurinesNearly every financing we execute involves a discussion on the benefits of including strategic investors.  Taking strategic capital is increasingly a financing alternative. Large tech companies are becoming more active and hiring staff to manage minority investments. We find entrepreneurs often misunderstand the perspective of the corporate investor. We also see early stage VCs who are overly wary of engaging corporate investors.  We believe in including strategic investors in a financing process. A thoughtful approach can produce a good outcome. We have also learned that poorly conceived partnerships will become frustrating relationships that create a future distraction.

Follow the suggestions below to increase the odds of success.

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Building A Company That Matters? Bring Your Wallet

It’s different now! The economics have changed.  Open source and the cloud stack allow talented people with an idea to build a company for pocket change.  No need to buy servers to create a development and test environment.  Just rent space on AWS.  Use temporary offshore resources to do QA.  No need for salespeople. Put the product on the web and let the customer download.  Use a freemium model to get users hooked. No need for brand investment. Debut at SXSW then tweet six times a day about your product.  No need to spend months courting venture investors.  You can build a company for what you spent last month on beer and Red Bull.

It makes for a great rap from the dais during the conference panel.

Unfortunately, it’s not true.

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Reverse Diligence on Investors

Reverse Diligence on InvestorsWe raise growth capital for tech companies, so I spend a lot of time with CEOs trying to choose between Firm A and Firm B as an investor.   I wrote an initial post on questions a CEO should be asking directly of a General Partner wanting to invest in the company. In this follow-up I share some questions to be asked when talking with external references.

The most valuable source of discovery is discussions with CEOs where your prospective boss has been an investor / Director. Request a few references. Any reputable investor will have them at the ready. Most will be surprised and disappointed if you do not ask.

Pursue the offered conversations, but also dig around on your own to find references not offered. A LinkedIn or Crunchbase search of current and former portfolio companies will turn up a few former senior executives. You may even find executives who were fired by the investor. Some references will share complaints over issues they brought on themselves, but you can usually filter the feedback and learn from it.

A few good questions for portfolio executives regarding how your prospective investor behaved include:

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Diligence is a Two Way Street

 

174440819-resized-600.jpg-300x200We raise growth capital for tech companies, so I spend a lot of time with CEOs who are choosing a new investor from between Firm A and Firm B.  Picking your investors is a critical decision that has long-term consequences.  Given the investors are often future Board members; you may be hiring your boss.

While the investors are busy scrubbing your background with calls to former colleagues, customers and classmates, you need to make time to do the same to them.  The sources of information on your potential investor include: (i) the investor, (ii) the references the investor provides (usually happy portfolio CEOs) and (iii) references you discover (often less happy portfolio CEOs).  In this post I will discuss the first group.  I will follow this with a future post on questions for portfolio executives.

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