The startup world has a lot of movers and shakers. You know the people that jump from advisors to entrepreneurs to VCs and back again. I am no different.
Before founding Earnest, a merit-based lending company, I had the good fortune of serving as a partner at the VC firm Andreessen Horowitz, where I worked on a variety of things from analyzing data to better help our portfolio companies to early-stage fundraising. I spent time analyzing the ideal team and resource needs at different stages of a company’s growth and how a company’s resource and hiring needs accelerate as they scale. I also looked at how Andreessen Horowitz managed their internal resources to best help individual companies. This knowledge played an instrumental role in my latest endeavor, especially when it came to the fundraising process and selecting the right investors.
Here are some of the most relevant lessons I learned while working as a venture capitalist that I use can use as an entrepreneur:
Bigger isn't always better. Most entrepreneurs want to raise money from the most prestigious VC firms without realizing that certain firms are better fits at different stages of building your company.
For example, First Round Capital only invests in the first financing round and has a smaller fund, aligning well with the appropriate investment sizes of early stage companies. Similarly, when you’re choosing your investment partners, industry and investing experience matter, but don't shy away from those partners or firms that might not be the biggest names. For partners at larger firms, the scarcest resource is time, and as an early-stage entrepreneur what you are really looking for is someone who will be available for advice when you need it most.
Takeaway: Think hard about which investors you approach. They should align with the stage and needs of your company. For early stage companies, angels can often be a better fit than VCs.
Go higher on valuation. Every deal’s terms, including valuation, are negotiable. Entrepreneurs are biased to ask for less money, believing it’s an easier sell. But the best entrepreneurs are confident they are building a big company and want the capacity to make it successful. Remember, VCs’ scarcest resource is in fact time, not money. They identify only a few companies each year and typically want to put more money to work in those companies, not less.
Takeaway: Don't be afraid to fundraise for a larger sum. Have the confidence to tell investors that your company is worth that higher valuation and stand behind it.
Don't think about an exit strategy. VCs invest in companies they hope will be large, sustainable businesses worth billions of dollars, so entrepreneurs who discuss “exit strategies” in their earliest pitch deck can really turn them off. For the great entrepreneurs there is no realistic end state -- they will just continue to build bigger and better companies. When any VC asked about exits or acquisitions for Earnest during our first round, I'd explain that down the road there are lots of companies that we would look to acquire. Sometimes we got blank stares, but this is what we believed. If you are building a world-changing company, you should too.
Takeaway: Lose the exit strategy slide. Instead, talk about the opportunities your company can take advantage of at scale.
Hire missionaries. One thing that really surprised me working in VC firms was how often we heard multiple pitches of a similar idea. This is why VCs so often talk about "team" as being the most important investment criteria. They mean that building a great company in this space is going to be a battle: Do you have the right team to win? It’s not just about previous experience or technical skills. More important is the culture fit of the team: Does everyone work well together, does each member have the passion to solve this particular problem, survive the ups and downs of an early stage startup and do whatever it takes to be successful?
Takeaway: When recruiting early employees, DON'T PAY THEM THE HIGHEST AMOUNT. The people who are the right fit will believe in your mission so much that they’d likely work for free if they could.
But don't be afraid to spend. While one of the best qualities of early stage founders is that they have an amazing ability to do more with less, once you do receive funding, you must shift your mindset from working out of your living room. Your investors have said to you, "We believe in you and what you're building. Here's the money to make that happen." That investment is an opportunity to build something great, and you need to have the confidence to seize it.
Takeaway: Don't be afraid to start investing for the future once you’ve raised money. If there are critical pieces to building your business, don't be scared to spend the money to make that happen as quickly as possible.