Home Relationships in Early-Stage Investing: Riskier, Harder, More Rewarding

Relationships in Early-Stage Investing: Riskier, Harder, More Rewarding

The following is one in a series of guest posts we’re running here on ReadWriteWeb. This one is by Reshma Sohoni, CEO of Seedcamp, the global organization dedicated to helping entrepreneurs grow successful businesses. Prior to her role at Seedcamp, she was an associate at 3i and Softbank’s eVentures India, and Senior Manager in Commercial Strategy at Vodafone.

Having listened to pitches from over 140 startups from all over Europe, working with 14 of our companies during the past two years, and reviewing applications for our annual event in the next few weeks, I am struck by just how different the requirements of early-stage investment are (for both investor and entrepreneur) compared to those of venture capital or private equity.

In my experience, early-stage startups rarely differentiate between sources of funding, with the possible exception of angel investors, with whom they often have ties. They simply work out a figure, create the business plan, and start pitching — paying little regard, at their own peril, to the type of investor they’re bringing on.

Sure, investing in an early-stage company is, at the very least, about spotting opportunities, making the right investment, helping with introductions, and being a board member. But there’s much more, and it is really about getting in the trenches.

Generally, investors get involved with their early-stage companies (if their relationship is good) by helping with product and business planning beyond the board (sometimes weekly), challenging the entrepreneur when they need it, experimenting and taking risks alongside them, and often acting as a cheerleader and sounding board. Although VCs and private equity investors do get involved from time to time in the “nuts and bolts” of the businesses they support, they are generally not expected to do so in the beginning.

One is not better than the other, but companies at different stages require different types of investors. And to have the best chance of success, both the investor and entrepreneur need to recognize exactly what kind of involvement is needed and then act accordingly.

The spirit of mentorship is thriving in the European entrepreneurial community: money can get you a lot, but putting a price on connections is impossible. Ask a successful entrepreneur about the people who helped him or her along the way: the list is almost guaranteed to include individuals who may not have invested money but who made important introductions, offered advice, or gave honest and timely feedback.

Several key points consistently emerge from the feedback I have heard over the past few years.

For Investors

Higher bar for higher-risk investments

Even though you like an idea and think it has the potential for great returns, the company has a much higher chance of failure if it is very early-stage. Many more things can simply go wrong at such an early stage. It’s crucial that investors understand this level of risk and treat it differently than they would for a later-stage company, because mismanaging expectations of early-stage companies makes for an unstable foundation on which to build and grow.

Get your hands dirty

The entrepreneur will benefit from more than just your money. Success will come more easily if you like the idea, like the people behind it, and feel passionate about the market it is targeting. So, you’ll have to work closely; and the closer you are, the better you’ll be able to tell whether the investment will succeed or not.

Use different metrics

The proof points are different at the early stage, so you need to measure traction with shorter milestones and much more specific metrics than overall revenue and profitability.

For Entrepreneurs Seeking Investment

Try, fail, improve, try again

Whether it’s your first startup, your first approach of a customer, your first strategy, or any intermediate steps, you will experience some failures and mistakes. The most important thing is to keep iterating and improving.

Pay-off from the relationship

While a healthy early-stage entrepreneur/investor relationship inevitably has a lot of interaction, preparing ahead of time for meetings and calls and setting clear goals for what you would like to get out of the interaction is critical. Make your investors help you and work for you. Just as they’re assessing you, you should always have a clear sense of what they are doing for you. Again, this is even more critical at the early stage.

Pace and execution

Fast pace and execution are more critical at the early stage than any other. A good investor will be watching closely to see that you move fast and execute well. Not only is this good for your relationship with the investor, but it is even better for your business. Here in Europe, we need to quicken the pace by at least 50%.

The startup community in the UK and Europe is a force to be reckoned with, and the better we can foster successful investor/entrepreneur relationships, the more we will all succeed. Timing is also important, and we at Seedcamp are taking a very long-term approach to building successful early-stage businesses — looking at the next 15 to 20 years, rather than just 1 to 3 years. Rather than criticize, let’s all put the building blocks in place to create a strong foundation for entrepreneurship and venture capital.

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