How to Ensure Every Investor Board Member is Aligned with Your Aspirations
In today’s frothy startup world — one in which valuation conversations seem to be increasingly reaching into the hundreds of millions or billions of dollars — many experienced VCs and founders have begun to question the factors driving entrepreneurs’ motivations when they raise outside capital.
Should they be trying to achieve the highest valuation? Retain as much equity as possible? Secure the backing of the biggest brand-name investor with the biggest network?
While those factors are certainly worthy of consideration during any fund raise, what often gets ignored is how well a potential VC suitor aligns with the company’s mission, vision, and aspirations. More specifically, few entrepreneurs perform enough due diligence on the actual VC partner who will eventually assume a very prominent role on their board of directors.
In cases where entrepreneurs do perform diligence on potential VC partners, they often stop there (with the individual partner). That’s a big mistake if the VC you’re partnering with has a team-based, value-add approach like OpenView does with its Expansion team. Those types of value-add consulting groups often play a big role in helping a VC’s portfolio scale more efficiently, and you’d better be sure that team’s mission (and skills) align with yours.
Building a big, successful business, after all, isn’t an individual sport, where you’re reliant only on yourself (or a few other people on your team) to create something great. Instead, it’s a little bit like operating a professional NFL franchise, where success hinges on assembling the right tactical, operational, executive, and investment talent, and ensuring everyone is focused on the same goal: winning.
3 Common Friction Points with Misaligned Investors
When you’re going through the fundraising process, it can be easy to fall in love with an investor’s celebrity or a VC’s logo wall. If an investor has experienced a few successful exits, that history often weighs significantly into an entrepreneur’s decision on who to partner with — and maybe rightly so.
Then again, what does that history or that celebrity really say about how an investor’s experience and domain expertise aligns with your business? How patient is the investor? Historically, how quickly have they pushed for an exit? Do they share your understanding of your market and your vision for how to create a powerful brand in it?
If not, then the honeymoon post-investment may not last very long.
In my years as a VC, I’ve seen three particular scenarios wreak havoc between misaligned investor board members and founding teams.
- Investor board members being spread too thin among too many boards, and failing to give any one company the attention it deserves. This is particularly true of celebrity VCs who are often stretched across a dozen or more businesses. One way to get a really good understanding of a VC’s concentration on his or her companies is to take the firm’s number of portfolio companies and divide it by the number of partners. Any ratio greater than 8:1 often leads to watered down focus and less partner time per company.
- One (or more) investor(s) pushing the CEO to look for an exit, while another is aligned with a longer-term vision to keep growing the company. If a lead investor is ready to sell and sees a clear opportunity to do it, they might push you before you’re ready. This can really disrupt board (and company) operations, focus, and cohesion.
- The founder wanting to raise another VC round, but one investor board member preferring to maintain status quo. Whether because of a lack of funds to participate in a follow-on round, or a concern that new investors will supersede their influence, whatever the case may be, the investor’s influence on the board can keep you from accessing the capital you need to grow.
In all three scenarios, the same thing generally happens: the board begins to fight, causing it to lose focus on critical operational and strategic objectives. As a result, the company loses momentum, derails, and, in the worst of situations, fails completely.
What You Need to Consider Before Signing a Term Sheet
After you decide when to raise your company’s first institutional round (and from what type of investor), it’s absolutely critical to do two things: Look beyond the highest valuation offer you get and perform due diligence on each investor (and their team).
Ultimately, there are a few things you’ll want to look at:
- The size of the investor’s fund and the amount of capital that will be reserved for your company
- The length of time that they hold onto investments
- The investor’s alignment with your mission, vision, and values
- The VCs history and how it aligns with your ultimate goal for the business
- The willingness to bring on new investors in follow-on rounds
That last point is particularly important for high-growth businesses. When I worked at Insight Venture Partners in the early 2000s, one of our more successful investments was ExactTarget — the Indianapolis-based marketing software company that sold to Salesforce in 2012 for $2.5 billion (now known as the Salesforce Marketing Cloud). That’s the key lesson here: Ensuring that every investor you bring aboard buys into — and very clearly aligns with — what you’re trying to accomplish. If you do that, then you’ll stand a far greater chance of building a cohesive, complimentary board that works together to achieve the ultimate goal — building a great, big business that achieves a great, big exit. If you’re looking for more advice on how to put together a cohesive board, download our guide to creating a high-impact board of directors. It’s written specifically for CEOs of early stage and expansion-stage companies who lack significant experience creating and overseeing boards or who find their existing boards to be suboptimal or dysfunctional.
At that point in your growth, you should be looking at a process for evaluating new investors both for valuation purposes, and — more importantly — to find investors who may be a better fit for your company’s next stage of growth. One of your evaluation criteria should be the alignment between your existing investor and a new investor that you would bring on board. You must make sure that both firms are aligned in their commitment to the company, that they are both in line with the company’s long-term aspirations, and are willing to stick out the investment until a natural exit manifests itself.
The company also happened to be one of my favorite boards of all time.
It was comprised of three investor board members — ExactTarget CEO Scott Dorsey, and two independent directors. Meetings went fast. They were always productive. The management team didn’t hesitate to seek feedback from the board, and the board often bought into Scott’s recommendations. We all walked away having really enjoyed the experience of working together.
Of course, a $2.5B acquisition has a way of doing that, but ExactTarget’s success — and our board cohesion — was really the product of Scott Dorsey’s focused approach to building the board from the onset. He spent a lot of time vetting potential investors, was incredibly team-oriented, and had a knack for understanding how each person fit into the bigger picture. Each board member’s skills and perspective was unique, but we were all aligned around the same mission, vision, and values.
When I worked at Insight Venture Partners in the early 2000s, one of our more successful investments was ExactTarget — the Indianapolis-based marketing software company that sold to Salesforce in 2012 for $2.5 billion (now known as the Salesforce Marketing Cloud).
That’s the key lesson here: Ensuring that every investor you bring aboard buys into — and very clearly aligns with — what you’re trying to accomplish. If you do that, then you’ll stand a far greater chance of building a cohesive, complimentary board that works together to achieve the ultimate goal — building a great, big business that achieves a great, big exit.
If you’re looking for more advice on how to put together a cohesive board, download our guide to creating a high-impact board of directors. It’s written specifically for CEOs of early stage and expansion-stage companies who lack significant experience creating and overseeing boards or who find their existing boards to be suboptimal or dysfunctional.
It’s not an easy decision, but most important ones in life aren’t.
We hope this framework makes planning during this uncertain time feel less like summoning a crystal ball and more like navigating with a map.
In this environment, it doesn’t matter if you’re the CEO of a startup or a well-established company—you’re going to have to make some difficult choices that will probably keep you up at night.