Decisions, Decisions: How to Choose Your Investors

Karthik Sridharan W’07/ENG’07, Co-founder and CEO of Kinnek

Properly choosing your investors is one of the most important, but often overlooked, aspects of building a tech company. As an early-stage entrepreneur, you’re constantly dealing with so many major existential questions (“Will our company exist next week?”, “Why can’t we convince a single person to invest any money in us?”), that the matter of deciding between multiple investors seems like a real first-world problem. I had many friends volunteer the advice that “beggars can’t be choosers” in those early-stages; they figured we should just take money wherever we could find it. Boy, am I’m glad I didn’t listen to them!

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If chosen right, your investors can help you accelerate growth and build a stronger company.  If chosen incorrectly, you’re in for a world of pain. Some of my founder friends have experienced dreadful investor scenarios—from an investor who asked for his money back when the company was experiencing difficulties, to an investor who bullied his way into an “unpaid internship” at the company. It all boils down to good relationships. An investor should be sophisticated and experienced, know when to give you space or when to give advice, and understand that ultimately it’s the founders (and their team) who will cause the business to succeed or fail.

Knowing what to look for and what to avoid in an investor is critical at any stage of your business. Those ideal qualities that make a great investor change as you move from stage to stage.

Seed Round

For the seed round, optimize for investors with a deep network of connections. They can help identify potential investors for your next round. At Kinnek, the biggest value-add that our seed investors provided was to connect us with investors to pitch for our Series A. Having well-connected seed investors made all the difference in the world; we were able to set up meetings quickly and efficiently when the time came to raise funds.

The second aspect to look for in your seed investors is extensive seed-investing experience. This is important because your seed investors can be most helpful when they provide very high-level strategic advice abstracted from the day-to-day operations of your business. An investor who hasn’t been on the operating side for years may not have the wisest advice for optimizing a Google AdWords campaign or setting up a continuous integration server. However, they can provide thoughts on future fundraising, growing your team, structuring your compensation plan or avoiding common early-stage pitfalls.  With that in mind, investors with a wide investment portfolio have a deeper well of companies and experience from which to draw for this kind of advice.

Series A

One of our seed investors gave me a great piece of advice: when it comes to choosing your Series A lead investor, focus on choosing the right individual partner, not the fund. This sounds counterintuitive, not least because media headlines tend to emphasize the VC firm itself, e.g. “Matrix Partners Leads Series A.”  The reason why it’s so critical to focus on the partner is that typically your Series A lead investor nominates that partner to be on your company’s board of directors. This is a long-term commitment; you’ll have to deal with that board member at all future board meetings until the exit. You won’t be dealing with the entire firm, you’ll be dealing with your individual partner—their advice, their personality, their nuances. You want someone who really believes in your vision for the company and your approach to building the company. As a wise investor once told me, “You don’t want to feel like you’re re-pitching your company to the board every time you have a meeting.”

As a side note, it’s worth mentioning that Series A is typically when really big sums of money start being thrown around. When large quantities of money are involved, elbows tend to grow sharper and people’s attitudes change quickly. You want someone you can trust. If you don’t feel comfortable sharing your deepest concerns about your company to that partner, be wary about signing a term sheet with them.  At this stage, you’re not just taking the investor’s money and waving goodbye; you will be dealing with them very closely as you grow your business in the years to come.

Series B & Beyond…

While most of the considerations for Series A still apply to subsequent rounds, you’ll also want to align yourself with an investor who has prior experience with large partnership deals, M&A transactions, handling corporate development offices and maybe even IPOs.  As your company grows bigger, these will become increasingly important areas to think about. As a first-time entrepreneur, you’ll probably have the least amount of experience in those areas.  It helps to have a steady hand who can give advice at those critical junctures to complement your skill sets.

Additionally, it’s helpful if investors at these stages are plugged into a strong network of professionals to draw from for more senior hires. While you may not have relied on your investors in previous stages to help you find more generalist, jack-of-all-trades type hires, you’ll want to call on them for senior hires like COO, CFO, and VP of Product.

If you take anything away from this article, let it be healthy skepticism for both the adage that “all money is green”, and the generally held belief that all investors add tremendous value. It does make a big difference who you take money from, and it isn’t always the case that investors are helpful (in fact, they could be detrimental). As a founder, it is your responsibility to raise money for your company, but you also cannot be naive. Recognize which investors are appropriate for you at every stage of your company’s growth. At every step of the way, think about what deliverables you truly need from your investors and optimize for those who can deliver on those needs.

Karthik-headshot-smBio: Karthik Sridharan W’07/ENG’07 is co-founder and CEO of Kinnek, the marketplace for small business purchasing.  He finds it incredibly rewarding to be building a platform that helps small business owners succeed in the face of pretty daunting challenges.  He lives in New York City and in his spare time, he enjoys being a connoisseur of breakfast cereals.