When it comes to investing, it’s standard practice for venture capitalists to do their due diligence in researching, vetting and choosing companies to invest in. But what about the other way around? Venture capital funding actually boomed in 2020: startups raised 13% more from VCs in 2020 than 2019, but woman-founded companies raised just 2.2% of total funds in 2020 – a decrease from 2019. In the Covid-19 pandemic era where decisions are more meaningful than ever, it’s critical for founders (especially woman founders) to choose VCs that are aligned with their company, their mission and themselves.
Not only have I been divorced, but I’ve had a bad breakup with a VC and was forced out of my own company. While this story does have a happy ending – I eventually was able to buy back my company and nurture it back to financial stability – it does serve as a cautionary tale that I hope others can learn from. Now when raising capital for my business, I flip the script – choosing investors that are right for my business by leaning on my support system, doing my own due diligence, and sticking to my values and vision. Let’s dive in.
It takes the right village
On top of losing my company, I ended up losing many of my “friends” as well. The people and business partners that I thought would be there for me no matter what had suddenly seemed to forget who I was and didn’t reach out to see how I was doing. Lesson learned: the ones who truly have your best interests in mind will be there for you when it seems like there’s nothing else left.
Throughout the journey of becoming a business owner, it’s likely you, too, have established a professional and personal network of individuals that will have your back no matter what. Utilize this community! When looking for investors, remember you’re not alone. Not only can you lean on the support system that knows you and has your best interests in mind, but you can use them as a sounding board for ideas, constructive feedback, and new perspectives.
Research and outreach
It’s important to go beyond your circle as well. In addition to research into VC websites, portfolios, previous press, and more, consider reaching out to the founders of other businesses your prospective VCs have previously invested in. You want as much context from as many relevant sources and resources as possible to help inform your funding journey.
VC investor references are important to consider, but they usually only include founders who have had good experiences with them. Sites like CrunchBase can be extremely useful – for example, you can utilize it to identify companies your prospective VC has invested in that don’t exist anymore. I noticed this during my own time raising money – there was a big difference between who was listed on Crunchbase compared to who was listed in VCs’ portfolios. There are many reasons for a company to go out of business, but if it was in part a result of toxic or messy VC relationships, it should be on your radar.
Keep your eyes open and look for what *isn’t* there.
Investor relationships can have red flags, too. The VC I worked with wanted growth at all costs – I needed the funds at the time, but ultimately we disagreed when it came to our long-term interests and goals. Capital is essential to fund and grow a successful business, but an alignment of values, vision, and philosophy between founder and VC is equally as important.
A true reflection of VCs’ vision and values can’t solely be found from internet research – it’s often subtle (or not so subtle) signals and red flags that arise during conversations, negotiations, and other interactions that are most telling of an investor’s true goals. Part of your own due diligence is defining what values and philosophies you want to help drive your company’s mission: stick your values and make sure your investors buy into them from the start.
Inquire about investors’ investment philosophy AND exit philosophy.
No one, VCs included, can predict the exact outcome of their investments. However, many investors have an agenda nonetheless. In the last year, raising money felt like my full-time job. Instead of looking and waiting for the highest valuation, I made the decision to take funds from a group of investors I knew were aligned with my own strategy and who were clearly supportive of women founders.
In addition to establishing a sense of an investor’s investment philosophy, it’s important to consider their exit strategy as well. If you can establish an understanding of their long term goals and desired terms of agreements can signal whether a disagreement down the line is just a bump in the road in a successful relationship, or the potential to lead to a messy breakup.
At the end of the day, breakups may be unavoidable, but they can lead to a new chapter that is truly incredible for you and your business. My VC breakup is one example of this – SupportPay is financially stable and is continually pushing innovation to better serve our partners and customers. Hopefully my VC can be a cautionary tale and inspire other founders looking for funding to flip the script and get the most out of their future investor relationships.