allensblog

Startups - The Truth About "Cold Calls" from Investors

After money, time is an entrepreneur's most precious resource.

Because entrepreneurs are genetically programmed to spend time talking to any prospective investor who shows the slightest interest in their company, this can occasionally be a problem. Sometimes, entrepreneurs in early-stage companies will get emails or phone calls from people who identify themselves, not by title, but something like "...I'm with a well-known venture capital firm called "X", and I'd love to hop on the phone and find out more about your company."

A real-life example recently received by one of my "Sherpa" companies (names redacted): "Hi, I work at __________, which is, as you, no doubt, know, a very well-known, early stage VC - we are one of the leading investors in ________, _________, and ________ [lots of relevant and successful companies]).  I’ve been following the press regarding [your startup] and would love to hear more about your [current offering], as well as your plans for the future of the business."

What could be better than this? 

After all, entrepreneurs mostly spend their fundraising time and effort fruitlessly scrounging for meetings with investors, most of whom don't even bother with a reply after a meeting (if you're lucky enough to get a meeting).  Yet, here's someone at a reputable firm actually reaching out to me!

The problem is that it's a head fake.

Here's why:  many larger "venture" (really, small PE) firms, particularly NYC-based ones, have armies of Analysts and Associates whose job it is to do research, and, in that connection, to cold call lots of interesting early-stage companies.  It is always a good way for them to get educated, and almost always a total waste of the entrepreneur's time.  

It is a sure thing that any firm that has Analysts and/or Associates to reach out to an early-stage company is too large, and late-stage focused, to be interested in a financing round smaller than $10 million - $50 million.  They will, of course, prevaricate and say that they are – but they simply aren’t, and can’t do it as a matter of business model discipline.

Moreover, if you have the right kind of folks helping your company, there are no firms of the caliber you would want to have as investors to which you won't, “around the table”, have access at the senior partner level.  If you don't, spend the time to find someone with those connections.  Analysts and Associates, almost never have the "juice" to move a deal through a big venture partnership.  Not their fault; just the way the world works.

So, if you receive such an email, always check out the writer on the web site. If it says anything other than Partner, General Partner or Managing Director (or,sometimes, Principal -- in some firms, Principals can lead deals, sit on boards, etc.) best to write them something like:

“Thanks for the note, and we appreciate the interest.  When we are ready to do a financing in which [your firm] would be interested, we’ll be in touch with [your firm].”

If it does say Partner, General Partner or Managing Director (or Principal), then you may be in luck.  It sometimes happens -- in my experience, about once every 3 - 4 years in my medium-sized portfolio.

Advisory Boards - Less Than Meets the Eye

"Advisors", especially in large numbers, are very difficult to manage properly, and almost never yield the value desired by entrepreneurs who engage them.  For the reasons below, they usually also result in equity "leakage" that could be put to better use in hiring or rewarding key employees.

Most often, this is the entrepreneur's fault -- the Advisors aren’t "managed" properly. 

It is important to remember that almost all Advisors have demanding, time-and-attention-consuming “day jobs”, which occupy all of their “default” attention (and, usually, it's their success at their day job that makes them prima facie attractive as Advisors).  Accordingly, they won’t normally have time to think about your business unless you specifically make them. 

One needs to very actively manage Advisors in order to extract the expected value from them.  With even a modestly-size employee base, most entrepreneurs don’t have bandwidth to do this. 

Even if one doesn't expect much active involvement from an Advisor, one is sometimes tempted to engage an Advisor (along with an equity grant) with the thought that his association with the Company will add luster to the Company, or somehow burnish the Company’s image -- the theory of "reflected glory".  I find this never to be the case.  Prospective investors and business partners, informed by experience, have become cynical on this point, and discount it almost completely.

Finally, it is also quite hard, emotionally, to “fire” advisors, especially when they haven’t done anything wrong except not be proactive (which, per above, they rarely are due to their demanding "day jobs"), so the equity “leakage” continues until they’re fully vested.  The difficulty is frequently compounded when the Advisor is an eminent person and, thus, doubly embarrassing to "fire".

When considering engaging one or more Advisors, look very hard at the value they'll bring -- and don't do it unless you intend, and have the management bandwidth, to actively manage them.

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P.S., the foregoing applies to individual Advisors; the arguments are ten times as powerful when applied to Advisory Boards, who are expected to act together as a board.