5 Ways to Evaluate Investor Alignment Before They Write a Check
Published on December 28, 2012
“Do your shareholders choose you or do you choose them? Sophisticated CEOs choose their investors by defining their particular business approach and strategy and ensuring that their investors are aligned with that program.” – Bill George, former Medtronic CEO
Startup founders eager for cash can put the long-term vision of their venture at risk if they make assumptions about investors and why they want to participate. Startup investors have various objectives in mind when they consider a startup, including financial returns, passion for the narrative, or affinity for the team involved. But when investors’ motivations diverge from founders’, friction ensues — so it’s up to you, as a founder, to make sure your investor’s goals align with your own.
In my nine years of building startups, I’ve heard many stories of misalignment causing entrepreneurs and investors to row in different directions. That’s why I began wondering how I would explore alignment when I co-founded Fig, a mission-driven startup focused on enhancing holistic wellness for consumers.
Importantly, alignment is different than “value add,” which is about the relevant skills, connections, and reputation that an investor provides your company. Value add is important, but it isn’t everything. Alignment is sharing commitment to the same mission, values, and time horizon.
Here are a few approaches I’ve found helpful for exploring fit along these dimensions:
1. Define your mission and values and share them early.
What is the purpose of your venture? What principles are most important to your founding team? What are your objectives and exit plans? This clarity will help with evaluating investors, team members, and other kinds of of partners. Clearly articulating these values, as companies like Twilio have done, is also important for creating a reinforcing culture. At Fig we aim to incorporate our values into every hiring, investor, and partnership decision.
After determining your mission and values, ensure investors know they are important by sending them in your pre-pitch deck. Including 1-2 slides on mission and values as part of a 5-6 pre-pitch deck will not only highlight their importance to you but also allow investors to self-select based on compatibility — saving both of you time.
2. Share specific instances of your values in action.
Give specific examples of your behavior that illustrate your commitment to your mission and/or values. While many investors are hoping you’ll build an enduring and consequential company, others are hoping for a quick flip.
When I told potential investors that my co-founder Bart and I rejected our first acquisition offer largely because we were not convinced it would lead to furthering our mission, I was conveying our commitment to building a mission-driven company over the long term. My goal was to weed out investors hoping for a quick exit.
3. References are a must.
You wouldn’t make a key hire without checking their references. Do the same for potential investors. Leverage your network of friends, mentors, and former colleagues to both find and screen potential investors. Your friends are likely to share at least some of your values and know others who hold similar priorities. Structure these discussions beforehand to honor your friends’ time. Your company’s mission and values should determine what you’re solving for.
4. Be transparent with your due diligence.
Sometimes it’s impossible to evaluate alignment before a meeting. If an investor seems keen on moving forward, let them know you plan to talk with mutual contacts. I’ve found it helpful to ground this “heads up” in a spirit of reciprocity.
While raising funding for Fig, I would say, “I want you to be confident in who you’re investing in, Mr. Investor. Feel free to talk to anyone I’ve worked with in the past — I’m even happy to introduce you to one or two Fig investors. I plan to call one or two of my friends who have worked with you. I want both of us to enter this partnership with eyes wide open.”
5. Pay attention to your emotions and internal dialogue during pitching conversations.
Building a company will definitely have its ups and downs. Choose investors you want to spend time with at the peak and in the valley. Quality time means enough time to accumulate sufficient firsthand data for your mind and impressions for your gut. In my experience, most investors will want two conversations with you before they invest. During these conversations, ask yourself, “Do I want to spend more time with this person or less? Would I be proud to introduce this investor to my team?”
Investors are key business partners; misalignment with investors has the potential to negatively affect all other areas of your business. Prioritize alignment from the beginning, and enjoy the benefits of everyone rowing in the same direction.
Kevon Saber is cofounder of Fig, a mobile startup focused on personal wellbeing. Prior to Fig, Kevon co-founded GenPlay Games, a mobile games developer which has created 15 games and $40+ million in revenue. Kevon holds an MBA from the Stanford Graduate School of Business.
The Young Entrepreneur Council (YEC) is an invite-only nonprofit organization comprised of the world’s most promising young entrepreneurs. In partnership with Citi, the YEC recently launched #StartupLab, a free virtual mentorship program that helps millions of entrepreneurs start and grow businesses via live video chats, an expert content library and email lessons.