We recently wrote on Techcrunch’s ‘Extra Crunch’ regarding the importance of founders learning how to build and maintain circles of trust with investors.
Many VCs tout their mentorship and hands-on approach to founders, especially those who run early-stage startups. But in the recent era of lightning-fast rounds closing at sky-high valuations, the cap tables of early-stage startups are becoming increasingly crowded.
Founders should definitely pursue big rounds at sky-high valuations, but it’s important that they recognize how important it is to manage who they allow into their mentorship circles. Initially, founders should make sure their first layer consists of the real “doers” — usually angels and early venture investors who founders meet with weekly (or more frequently) to help solve some of the most granular problems.
This circle is where the real mentorship happens, where founders can be open and vulnerable. For obvious reasons, this circle has to be small, and usually consist of two to six people at most. Anything more simply becomes unwieldy and leaves founders spending more time managing these relationships than actually building their company.
The second layer should consist of the “quarterly crowd” of investors. These aren’t necessarily people who are uninterested or unwilling to participate in the nitty gritty of running the company, but this circle tends to consist of VCs who make dozens of investments per year. They, like their founders, aren’t capable of managing 50 relationships on a weekly basis, so their touch points on company issues tend to move slower or less frequently.
That isn’t necessarily a bad thing, and we often see this circle of investors making extremely meaningful impacts on their portfolio companies through networking opportunities, key hires, partnerships and investor intros. Occasionally, they’ll roll up their sleeves on certain issues, but founders should expect this circle to move a bit slower and be less engaged than their closest group of investors.
The most distant group of investors, say the outer layer, seems to be the most rapidly growing circle in recent months. Massive liquidity in the monetary systems, huge IPO returns and massive growth in the VC space has led to increased competition in funding rounds. These dynamics have given rise to huge valuations, huge check sizes and funding rounds that close in days or weeks instead of months.
How founders manage their VC circles can mean the difference in success or failure for a thousand different reasons. Failure to leverage layer-one VCs could mean that the company never gets off the ground, failure to manage the middle layer could hinder the pace of scaling, and failure to manage the outer layer could result in extreme dilution for founders. However, if founders assemble their VC circles properly, amazing things can happen — and they do.
To read the full article, click this link.
Original Techcrunch Extra Crunch article here:https://techcrunch.com/2021/08/05/founders-must-learn-how-to-build-and-maintain-circles-of-trust-with-investors/