A few months ago, I was representing our venture fund, Cofounders Capital, at a monthly investor syndicate meeting. The meeting was made up of five local angel funds/networks, two local VC firms, and a few independent angel investors. If you are involved in the Triangle startup ecosystem, you probably just ran through a list of potential attendees in your head, and chances are the list is pretty accurate. That speaks to how tight-knit the local investor community is.
As we compared notes on deals and syndication opportunities, someone in the group joked that if the building we were in collapsed, we might lose the managers of 80% of the local seed-stage capital. Morbid as it was, the math was pretty accurate.
At the meeting, a particular local company that was actively raising capital was brought up for discussion. Almost every investor at the table was familiar with the deal to some extent. Very quickly it became clear, however, that everyone seemed to have a different interpretation of “how far along” that company was. This could be partly based on the faulty recollections of the investors, but I believe a lot of it was due to how the founders presented their story to different parties over time.
I have heard a recurring frustration from local entrepreneurs who are struggling to raise capital about what they feel is the “groupthink” of the investors in the area. They believe that if one investor passes on the deal, the others will automatically follow suit. I am not naïve enough to argue that some groupthink does not occur, but I think that entrepreneurs can actually use it to their advantage. Controlling your company’s story in a small investment community is critical, but the entrepreneurs may not always be the one telling the story. Here are some tips on investor communication that may help ensure that the stories that others tell about you be the ones that you want told:
1. Keep the KPI’s (key performance indicators) you are sharing consistent — All professional investors will track company progress, but often don’t have time to delve deeply into the monthly or quarterly updates you send out. Instead, they will likely benchmark your traction against the last update. In order to make it easier to decipher, keep the KPI’s most important to your business clearly highlighted in your updates and consistent over time. In the Triangle, many of the recipients of these updates are in the same network, and they will talk about your progress. You want to control what they are saying!
2. Keep the KPI’s you are sharing well-defined and build momentum within your story — We recently saw a local software company that pitched to Cofounders and told us that they currently had 20 customers. After a few probing questions we realized that they actually had three paying customers and 17 that were in some sort of unpaid beta and free trial, but they were labeling all of them as “customers.” The entrepreneurs immediately lost some credibility with us as investors, and our excitement was taken down a notch. Moreover, if they had originally spelled out the larger number of unpaid beta and free trial users and then the smaller number of paid customers — which is a much tougher category to crack — the pitch would have continued to gain momentum. At the same time, creating these well-defined buckets (in this case, of customer types) is valuable as your team expands to make sure everyone is using the same vernacular within the organization — and outside it.
3. Some metrics you simply must know off the top of your head – If an investor asks a founder/CEO “how many customers do you have?”, “how much capital have you raised?” or “how much cash do you have in the bank?” the founder simply must know the answer right then and there. There is a much longer list of these types of questions. Cofounders Capital has invested in 21 local seed-stage companies to date through our two funds and our most successful entrepreneurs can always answer these questions immediately. I am shocked, however, at how many times a seed-stage entrepreneur responds to one of these questions with “I’ll have to go back and look” or “somewhere between…” If the entrepreneur is not able to give a definitive answer, how is the investor expected to relay the message of the company to their investment committee, syndication partners, or advisers? And if they don’t know the answers to these most basic and essential questions, what else are they not on top of?
This advice doesn’t only apply to entrepreneurs who have raised capital, are at revenue, or have customers. Later-stage companies may need to have a definitive ratio they are tracking — such as LTV/CAC, or the lifetime value of the average customer divided by the cost to acquire said customer — while a company that is just getting off the ground might need to track the number of conversations with potential customers.
The key is for the entrepreneur to know, track, and communicate clearly defined, quantitative metrics to potential investors. In an ecosystem like the Triangle, the accuracy and consistency of this messaging from entrepreneurs to investors gets magnified, so companies need to use that fact to their advantage — or it may well be used against them.