Cruising 30,000 feet (Calgary/ Vancouver to Miami/ New York) has given me time to reflect and gain a bigger picture perspective. Meeting many interesting people (target investors and investees) answers a lot of nagging questions. Traveling sharpens the mind as it forces you to leave something behind and welcome the unknown; expectations meeting reality. Every time I hit walls, I take it to mean jump higher. Investing two-year boots on the ground in Alberta, amidst intimidating weather conditions, has only boosted my confidence about managing the investment risks ahead of us. Face-to-face interactions with the key stakeholders enable me to peel through layers of shells or human defense mechanism.
As we build our business, it is important to treat our target investees with empathy and coach them to become venture capital ready. Its not a zero-sum game where we win you lose or you win we lose. It’s about creating synergy and cultivating long term (approximately 10 year) partnerships. Money is just a means to an end. The investees must be married with strategically aligned investors. The investors must understand the founders’ challenges and the path they have gone through to reach certain milestones. Anything less is unacceptable. Investors and investees must be involved in a positive sum game.
Positive - sum game , in game theory, a term that refers to situations in which the total of gains and losses is greater than zero. A positive sum occurs when resources are somehow increased, and an approach is formulated in which the desires and needs of all concerned are satisfied. https://www.britannica.com/topic/positive-sum-game
How do we get there? Work religiously with the Letter of Intent (LOI) until both sides are ready to sign a Definitive Agreement (DA). It is during this process where each party can discern the true colors and motivation of each side. It is managing expectations and locking them into writing. It is resolving the strategic conflicts before diving into a joint business plan. Strategy is the compass, while the business plan is the map. It’s not funny how professionals and entrepreneurs get this wrong.
How do we do it?
Slow dating to speed dating but no shotgun wedding
Don’t enter deals out of desperation. This is where we invest our resources without immediate expectation of returns. We contribute value mentoring our target investees and giving them a chance to test or validate each others’ ideas. There is no sense forcing the issue. Everything must flow naturally. This is where both sides ask the question: Are the founders coachable? Conversely, are these VC investors the right partners for the next 10 years? Oftentimes the deal happens because both parties are desperate to close the deal - short term gratification for long term pain. Here are two cases where we help our targets before making actual long term financial commitments.
I met this founder in Florida working on a hemp car prototype. I found him because of his joint promotions with a name brand entertainer. His idea is great but with the US regulatory delays of implementation, his business development will encounter costly speed bumps. The US supply chain is at an infancy stage of revival. The solution? We invited them to relocate to Alberta. Canada has legalized hemp since 1998, albeit for food grain. As proof of thesis, we got news this week that his critical supplier is relocating to Alberta to continue their R&D, access supply chain and access other tax incented financing and grants. This tactic maximizes our collective ROI. Will it work? Absolutely! Our common social and environmental mission will bind us together. He is mission driven and he knows how to develop and acquire customers.
We have been working on this target for the last couple of years and witnessed them change COOs or CEOs several times. It has been a steep learning curve for both sides because the hired executives and the founders just don't know what they don't know. Some executives more familiar with mature businesses have this preconceived notion they can manage startups just the same. I am not saying we have all the right formula ourselves. It takes two to tango. What would work for one may be an abysmal failure to another. Culture fit is important. Making the founders feel safe that their baby is not being taken away is important. Building trust is something both parties have to earn. This is one big reason raising capital takes time. There is no shortcut to relationship building.
I have learned from my own mistakes too. During my naive days, I start with the business plan, the product, and spent extensive time validating the financial model. Total waste of energy. Now, I spend more time with founders, the team, their target customers. For startups, the customer validation data is the most important. Without the customer’s repeat purchases, the founders have to keep iterating until the customers say yes with significant purchase orders. After reaching a certain product market fit, we need to see the pilot phase of the manufacturing plant, and the process goes on and on.
So, what is the problem?
We as potential investors/partners have yet to do a better selling job to prove that we are the right partners for them. The founders should be more open and really get to know their target financial partners. VCs come in different stripes and colors. We are active hands on entrepreneurs, ex-corporate, and professionals looking for founders as partners to complete us.
There will always be problems along the R&D phase of startups if one views them as problems. View them as learning experience or as a process to develop customers and accumulate customer validation data. Eventually more resources (people, money, supplies) will flow to the startups. After all, we are only in business because we are solving our customers’ big pain.
Call to Action
Our performance will only be as good as to the quality of our relationships as investors and investees. Let’s grow together, maintain the conversation, and discover how we can create value for each other.