SaaStr 770: How to Avoid a Bad VC Investor with SaaStr CEO and Founder Jason Lemkin
Summary
In this episode of SaaStr, Jason Lemkin highlights essential strategies for founders to avoid partnering with bad VC investors. He discusses the critical importance of conducting thorough vetting processes before signing term sheets, emphasizing reference checks, understanding funding dynamics, and evaluating long-term support capabilities. The episode outlines various red flags such as VCs who do not write follow-on checks and the necessary discussions around control and involvement expectations. Lemkin stresses the role of personal rapport and mutual understanding between founders and investors, noting that relationships are vital for navigating challenges. He introduces concepts such as reverse diligence, asking potential investors about their past setbacks, and recognizing that control dynamics in venture capital are shifting. Furthermore, he underlines the significance of investment timelines and how they can inform a founder's strategic decisions. Lemkin concludes that understanding the fine print of investment terms is crucial for maintaining autonomy and ensuring a strong, fruitful partnership with investors.
Key Takeaways
- 1Thorough vetting of investors is crucial.
- 2Follow-on investment capabilities signal investor commitment.
- 3Changing control dynamics in venture capital.
- 4Reverse diligence is essential for understanding investor alignment.
- 5Building personal rapport can enhance investor relations.
- 6Investment timelines matter in strategic decision-making.
- 7Awareness of funding structures protects founders.
- 8The importance of external connections within the investment ecosystem.
- 9Approaching confidentiality with realism.
- 10Recognizing the limits of venture capital.
Notable Quotes
"Founders get this wrong. Founders think their guts tell them what a good investor is over the long run."
"VCs that don't write second checks are less valuable to you because you'll probably need one."
"Control is not as big a deal with VCs as it used to be."
"But boy, I'd rather have someone that's actually there with me on the journey."
"And you'll just learn a lot about them as a human, what their values are, what they care about."
"I want to hear about how you made all the money in WhatsApp and how you were the first investor in Canva and Samsara and Toast."
"You have to take their money if you hit it at the same price as before. Like tranches are a terrible deal."
"The thing is, look, most VCs don't care."
"Almost nothing is actually confidential is my final bit of advice."
"You have to be founder mode."
"No matter what the internet says, no matter how many people sell in their courses and hawking things say most folks, 99% of folks cannot raise venture capital."
"If you get to $8 to $10 million and you're growing even 40%, 50%, you will find you can hire all the people you need."
Episode questions
What are the signs that an investor may not be the right fit?
Lemkin suggests paying attention to how much control an investor wants over the company and whether they are expecting substantial involvement in decision-making. A red flag might be when an investor insists on voting rights and control clauses that might limit the founder’s autonomy.
Why is it important for founders to ask their potential investors about their second and third check capabilities?
It is crucial since investors willing to provide follow-on investments can significantly impact a startup’s growth trajectory. Founders should ensure they have partners who can support them through various funding rounds, especially in times of scaling. Jason Lemkin mentions that those who are not willing or able to provide future checks are generally less valuable, as the startup might require more resources in later stages.
What role does personal rapport play in the investor-founder relationship?
Personal rapport is essential in establishing a trusting and supportive investor-founder relationship, especially during challenging phases. Founders are encouraged to have informal meals with potential investors before signing agreements to assess compatibility, as this can influence the level of support received during tough times, which is critical to the startup's success.
How can founders ensure that potential investors align with their vision?
Founders should engage in reverse diligence by asking pointed questions about past experiences and investment philosophies. Inquiring about the worst and toughest experiences investors have faced can reveal their resilience and values, leading to a better understanding of whether they align with the founders’ vision. Creating a dialogue around these topics encourages openness and can foster an environment of trust during negotiations.