Sponsored by Latham & Watkins is a global law firm. Learn more. Startup Life/Interview/ Five ways to forge a strong investor-founder relationship From dumb money to shared values — what’s good and what’s bad in an investor-founder relationship? By Sifted 2 February 2022 Latham & Watkins: (left) Shing Lo, partner and Mike Turner, partner Latham & Watkins: (left) Shing Lo, partner and Mike Turner, partner Sponsored by Latham & Watkins is a global law firm. Learn more. Startup Life/Interview/ Five ways to forge a strong investor-founder relationship From dumb money to shared values — what’s good and what’s bad in an investor-founder relationship? By Sifted 2 February 2022 Take a marriage, add a boardroom and a cheque, then subtract true love, and you might be left with something similar to an investor-founder relationship. “Everyone says you’re getting married to someone after courting them for five minutes in an investor-founder relationship, but it illustrates the point nicely that actually there should be more to the relationship than just the chequebook,” says Mike Turner, a partner at Latham & Watkins, a law firm that supports emerging companies and investors. Turner says investor-founder relationships are becoming more nuanced as startup and investment ecosystems widen, so knowing how to forge a strong relationship from the beginning is key. Take a marriage, add a boardroom and a cheque, then subtract true love, and you might be left with something similar to an investor-founder relationship But how do you make sure your investor-founder relationship doesn’t end in heartbreak? We’ve got some tips from the experts. 1/ Don’t take “dumb money” Shing Lo, another partner at Latham & Watkins, says the most important thing for founders to remember when initially choosing an investor is not to take “dumb money” — money without any other help or resources. “Dumb money is not very valuable, it’s all about the smart money,” she says. “What else can you bring besides money, connections, support and so on — that’s really important to founders.” To do this, Turner says founders should ask investors what they can bring to the table before a deal is made. Not only will this save founders from investors who only care about returns, but it can catalyse getting to know each other. “They’re not a business partner, this is fundamentally different. They want to generate a return on their investment, whereas you may want to change the world” “Ask them to tell you what they can do for you apart from writing a cheque and then that will help you get to know them and what they can deliver to you and how they can support you,” he says. Alistair Crane, cofounder and chief executive of social shopping platform Hero, which was recently sold to Klarna, agrees, adding it’s also beneficial for founders not to place unrealistic expectations on investors. “They’re not a business partner, this is fundamentally different,” he says. “They want to generate a return on their investment, whereas you may want to change the world.” 2/ Set boundaries and expectations from the start To manage expectations, Crane says founders — and investors — should set out some clear boundaries from the start about what each party expects from each other. “I think setting out clear boundaries from day one is really important,” he says. “Some of the best investors that I’ve had back me are the ones who say, listen, we’re delighted we’ve invested in you, I’m very excited for you and your company, but I don’t need to hear from you every month with a 10-page email.” Establish what expertise, connections and insights investors can offer, and what information they need to operate effectively early on, Crane adds, and that founders shouldn’t go into the relationship expecting another business partner. “Some of the best investors that I’ve had back me are the ones who say, listen, we’re delighted we’ve invested in you, I’m very excited for you and your company, but I don’t need to hear from you every month with a 10-page email” “Don’t expect them to be a business partner necessarily,” he says. “They’re not there to help you run the business, they’re there to help you navigate the macro challenges, like the icebergs rather than decide every port you’re supposed to stop at.” Nigel Phan, founder and managing director of UK startup Whirli, a sharing economy for children’s toys, agrees. “Set up the boundaries of the relationship in the super early days,” he says. “I’ve been very clear at Whirli: investors should be investors and the management team should be the management team.” 3/ Be specific with what you need When the icebergs and macro challenges emerge, Lo says most funds know people that can help navigate startups through the different growth stages, and founders should use those connections. “Founders have to be brave to make use of the relationship when required — don’t just take the money, remember to leverage your investor’s expertise,” she says. “For example, use them to help grow the business, help with hiring, help with making connections with potential customers.” Phan says to stick to his boundaries, he identifies three things investors can help with and asks for them. “Founders have to be brave to make use of the relationship when required — don’t just take the money, remember to leverage your investor’s expertise” “I think about the three things I want our investors to engage with,” he says. “These are the three things that are most strategically important for Whirli, and areas investors can provide genuine support on, whether it’s helping with recruiting or using their broad networks.” Lo says investors’ help is particularly valuable when hiring a C-suite. “Founders often need help with hiring the C-suite team,” she says. “If investors can help get them a really hot CFO, someone who’s very experienced, that’s extremely valuable from the founder’s perspective, because the success of the company is not just the founder, but the management team.” 4/ Be transparent about strengths — and weaknesses For Turner, the bad founder-investor relationships he sees are the ones where founders don’t open up and treat the investor as an arm’s-length business relationship. “One example of a bad founder-investor relationship is where the only communication is the board meeting and the founder is putting a spin on the numbers and the performance,” he says. “It’s all just in the data reporting, as opposed to how do I progress from here to there, how can you help me.” Phan notes that a good relationship is founded on trust, which means founders need to be careful not to oversell. “Founders should be able to pick up the phone to the investors and say ‘I just lost a big customer, what do you recommend I do'” “I think a lot of it comes down to trust, it goes both ways,” he says. “What is really key is building good trusting relationships with investors, even before they become your investors and demonstrating to them that you’re not only incredible but you’re not here to oversell.” Turner urges founders to go out of their comfort zone and have faith investors and founders can sort out problems together. “Founders should be able to pick up the phone to the investors and say I just lost a big customer, what do you recommend I do,” he says. “Talk openly and transparently about the challenges, as well as the good things.” 5/ Make sure you have shared values For Phan, shared values are very important in his relationships with founders as his startup has a strong vision in sustainability and child development. “What makes a real difference — and where there is a real difference from investor to investor, fund to fund, individual to individual — is that common alignment on values and common alignment on the mission and the ways of working,” he says. If these values aren’t met, it’s OK to say no or for investors to say no to you. Crane adds that mismatches and rejection are just part of the process. “I used to be totally obsessed with trying to convince people when they first said no, that they got it wrong and they should say yes,” he says. “It could be for a million reasons and a whole bunch of them not to do with you, your business, your industry, your trajectory, there are too many to name.” Click here for Latham’s resources for founders and entrepreneurs. Sponsored by Latham & Watkins is a global law firm. Learn more. 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