A startup’s early days are focused on only one thing, getting to ‘Product-Market fit’. Savvy investors talk about looking for ‘Founder-Market fit’, which they believe is key to getting ‘Product market fit’. Along with these two, I have been thinking about the concept of ‘Founder-Investor Fit’, which is not talked about much in the ecosystem. During the last few years, we have had multiple discussions with founders (both in our portfolio and outside) about how having (or not having) the right fit between investors and the company (or the founders) has been so positive (or catastrophic) for the company.
One of the triggers for this post was a blow-up that happened a few months back. A very well-known and respected investor got into legal tangles with a portfolio company. This portfolio company was founded by a college dropout, considered a maverick, second-time founder. Now, I do not know the founder too well to be able to comment on him or judge the situation, but I know the investors well, and they have been great partners to us and various founders over the years. I have to say, I do not know much about the issues here, and so, in no way trying to pass any judgment. In one of the media articles, it was mentioned that the relationship between the investor and founder broke down once the founder was trying to raise more debt without aligning the investor and also that the investor was not getting the financial reports on time. The moment I read it, my first thought was that this was never going to work for this investor. I know personally that they are not a fan of raising debt until needed and also are sticklers for financial reporting being done in the right way (we also agree with both, I must add). Beyond any other issues, this was clearly a case of not having a ‘Founder-Investor fit’.
So how should you think of ‘Founder-Investor fit’? Same as how you would think of fitment for an employee – you check for skills and cultural fitment. It is the same as a founder would do it for the next hire.
Let us first start with the ‘skill fitment‘.
In the case of investors, skill fitment will essentially mean that this investor usually invests at your stage and also has experience in your space. A very smart founder/operator, while discussing with me, had compared startup building to a relay race where investors and management keep giving reins to the ‘right’ next set of people. I find this to be quite a useful analogy. The ecosystem has seen many cases where things have not worked out ideally if the founders have not partnered with the ‘right investors’ for that ‘specific stage of the business’.
Similarly, investors with experience in your category will be more likely to have better insights and networks for the business. However, I believe that the right ‘stage fit’ is much more critical compared to ‘space fit’, as there have been a lot of companies where investors with no experience in the category have proven to be the most helpful.
What about ‘cultural fitment’?
We see that founders give a lot more thought to the ‘Skill Fitment’ while deciding their investor partners, but barely any thought goes into checking the ‘Cultural Fitment’ (or its equivalent). This is more critical in our view and here is how we would advise the founders to think about this:
1) Shared goals success metric: For a long-term successful partnership, be it a CXO, any other employee or even an investor, medium-term to long-term goals and the definition of ‘success’ should be the same for all parties. For example at Kae, our stated mission is to help entrepreneurs build enduring companies. If for an entrepreneur, success is to build and sell a company quickly, while this could be very rewarding financially (we get a lot of proposals with ‘you will get 5x in two years’ for your investment and the likes), is not in alignment with our definition of success. We prefer founders to go for building enduring businesses that outrun our time with the company multiple times, instead of building for a quick exit. Similarly, if a founder is looking to build a small/medium-scale but highly profitable and low-risk business, it would not be matching the goal of a large venture fund where the fund’s success is predicated on an outlier, multibillion-dollar outcome.
2) Alignment on success metric: Along with goals, how you measure success is another crucial consideration. When we work with early-stage portfolio companies, we ask them to identify ‘ICP’ and the right ‘success metric’. This is the same exercise that a founder should do, the right success metric for the short, medium, and long term has to be aligned with for good relationship between founders and investors. Just think about this, if a founder is chasing profit (say EBITDA) and the investor is only looking for topline (Or vice versa)- the board room will have two different languages being spoken in the review meetings. A right success metric aligns everyone to one clear north star and short-term milestones.
One of my portfolio companies recently did an alignment exercise in a board meeting, I found it very useful and recommend it to other founders regularly. Similarly, while evaluating a company some time back, the founder spent one full in-person meeting with me only asking me what success looks like to me for her business! I wish a lot more founders do it this way (Maybe not the full meeting, but you get the point)
3) Same core values: After alignment on goals/success metrics, it is very important to see if the founder, employees of the organisation, and investors align on key ‘core values’. A lot of investors are not very vocal about their core values (especially in India) but if you spend enough time with different people in the fund (and also ask), you can get a decent idea of what are the core pillars of their culture. It is then critical to see if there is a broad alignment between the company’s core values (which are mostly driven by the founders’ value system) and the investor’s core values. In our (Kae’s) case, we have ‘respect for all’ and ‘accountability to each other’ as two of our core values- we generally match very well with founders who also embrace these. There are a lot of investors who are very understated/ low-key (as it is part of their culture), if they end up investing in a very high profile, media-loving, flashy founder (or company), there is a good chance of not having a great relationship and outcome.
4) Discussing ‘Non-negotiables’: This is probably the most important alignment to seek and it flows from the values of the investors and founders. It is so critical that if needed, both sides should be upfront and explicit about it. For a lot of investors (including us) integrity is non-negotiable. Similarly, compliance and doing things by the book are the topmost priorities at every stage for a lot of funds. This requires an explicit check, that those non-negotiables are clear to both parties from the start and forever. By the way, this is very much binary- For example, there is nothing like being 90% compliant or integrity in 80% situations. This should be on top of the mind for all the relevant stakeholders at all times.
5) At the end of the day, It is all very personal: While investment funds are tight-knit teams and are aligned around their core values, goals, and procedures, the founder-investor relationship also has a lot of personal nuance to it. Different individuals at any fund usually have different preferences/expectations from the founders and a different way of engaging/working together, which is usually shaped by their individual values/persona and also their investing experience. A good match of personal values (and expectations) and the way of working together is very critical. This is what people usually bucket into great ‘chemistry/vibes’.
Even with all the points written above, it is still not easy for founders to figure out the right founder-investor fit. One of the key reasons is that we VCs are not known to be very transparent and articulate about our way of working and especially our core values. In such a scenario, the existing investors usually become the guide for the founders as they might know the other investors better. Beyond relying on the existing investors, founders should also talk to as many people as they can about the prospective new investors. We usually recommend our portfolio founders to do reference calls with other founders (and help them connect with too), who have gone through tough times in partnership with a particular investor. As they say, your value system and character are most clearly revealed when the going gets tough.
The idea of ‘Founder-Investor fit’ is very important for the investors as well and a lot of times it plays up in the evaluation process. The cost of getting it wrong however is much lower for investors compared to the founders. We were recently discussing the importance of checking for cultural alignment in a new hire with a portfolio company. I always use this statement by the legendary Vinod Khosla about investors with new founders- ‘Think of investors as an employee, whom you can’t fire’. When the founders think so much about cultural alignment with a potential hire, it is very obvious that this should be given more importance in the case of an investor.
I fully understand and empathize with the founders as finding a ‘right fit’ investor is not equivalent to choosing a culturally fit employee, especially as in a capital-scarce market, the relationship can be very asymmetric. However, it is still a very critical aspect of organization building and can be and could prove to be one of the most important factors in the success or failure of a venture.
