How to Know Which Investors to Let Into Your Inner Circle
For startup founders, it can be hard to determine which investors to keep as close advisors and which ones fit better as more passive players. What founders choose here can make all the difference, so it's important to get it right.
As startup funding rounds swell and all kinds of investors are forcing their way on cap tables of earlier stage companies, founders are having to balance being responsive to their investors with a sober understanding that some of them are not all built the same way.
As an early-stage venture capitalist myself, I'm used to fielding calls from Series A- and Series B-focused investors who are interested in hearing about our companies they should have on their radar. What's new is that the later stage VCs and growth equity funds are increasingly reaching out to get in on all the early stage deals as well.
Founders now stand to raise vastly more capital at a much faster pace in this environment than they ever have in the past. However, with more capital comes more responsibilities and more investors looking to take large positions on their cap tables along with board seats.
Early-stage investors vs. later-stage investors
Now it is all good and well for founders to raise seed rounds on valuations that would have been unthinkable a couple years ago, but later stage investors who are pouring more money on early-stage companies are often misleading these founders on where to focus their businesses and attention.
For example, we are seeing early-stage founders accepting capital from later-stage investors who are approaching these companies with Series C- or Series D-stage company expectations for results. Not long ago, I had to tell a founder to stop trying to put together a lengthy deck of data-driven insights a growth investor on his board was asking for in advance of a board meeting, as the deck was approaching 100 pages long.
Understandably, the founder felt compelled to meet the expectations of a large investor in his company, but the ask was completely out-of-touch for a startup that's still figuring out product-market fit. It was a request that's suited for a growth-stage company that's generating tens of millions of dollars in revenue, and whose priority is crunching data to find ways to optimize spending or customer acquisition strategies.
To keep from sinking time in wild goose chases like this, founders need to stay mindful of who their investors are and which ones should be in their inner circles of advisors, no matter how much capital they have poured into your business. This is always a bit of a conundrum when the later-stage investors have cut the largest checks and would seem to be due the most attention, but founders just need to take a moment to zoom out and appreciate that those investors are just trying to remain competitive in an incredibly frothy market by investing earlier and earlier. Their advice may become more relevant over time, but in many cases their pattern recognition is better suited for later-stage companies that have figured out all the answers, and sometimes misguided for early-stage companies still figuring it out.
Creating inner and outer circles of trust
I advise founders to think in terms of inner and outer circles when deciding how much attention to pay each of their investors. For the typical seed-stage startup, less than a handful of their investors should be in their inner circle. These will likely be angels and early-stage investors whose strengths are about getting in the weeds and solving hard problems jointly with founding teams. In the next ring are investors who can occasionally be helpful, like with making introductions for partnerships or hiring intros. And lastly, there will be an outer circle of investors who function really just as a name on the cap table and can jump in once or twice a year with a helping hand or email.
Another important dynamic for founders to consider on this front is where they stand within a particular VCs portfolio. Are they the darling? Are they a long shot? VCs tend to give the most attention to the companies they have the most conviction in, dedicating substantial time and resources to these select few portfolio companies. If you're one of those companies, great, but oftentimes founders can have unrealistic expectations around just how much impact a particular investor is going to make. Big checks have enormous allure, but it takes a lot more than capital to propel early-stage companies into growth stages.
All too often, later-stage investors are coming into early-stage companies and bringing their mindset and expectations with them. Early-stage companies are all about execution, whereas later-stage companies are driven more by scale. If you (or your investors) force your startup to scale too rapidly, then some of the most foundational elements of the company, product, service, etc. can go overlooked.
A founders' time is very limited, so keeping a small inner circle of impactful, engaged investors can make all the difference in setting up the framework for scalable, reasonable growth. This leaves founders with an important choice about precisely who they let into this inner circle. I always recommend that early stage founders keep their early-stage, operator-first investors closest until the product is solid, sales are growing and the company is ready to start ramping up scale.
This inner circle can change and once a company has reached certain milestones, founders might find that their early investors are ready to step back in favor of including growth-stage investors and experts. It's easy for founders to get ahead of themselves in this frothy market, so keeping their eye on the ball and surrounding themselves with the right advisors is something they need to keep optimizing.
In my experience, founders that keep this framework in mind are able to stay focused on what matters most and build long-standing, durable companies. With more investors than ever jumping into early-stage rounds, it pays to maintain those boundaries and not be cowed into appeasing investors who don't belong in your inner circle until the time is right. In the current market this is especially difficult, but it's my belief that maintaining this inner circle is one of the keys to success for startups of every size.
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