Here’s a simple, functional topology of entrepreneur-investor relationships:
- First — and worst: The Wasteful Relationship. Such a relationship is time-consuming, degrading, and distracting.
- Second: The Neutral Relationship. You get capital, and not much else.
- Third: The Minor Value Relationship. You get capital and occasional help on specific issues.
- Fourth: The Deep Value Relationship. The inspiring partnerships that truly move the lever for you as an entrepreneur and for your company.
As entrepreneur, you should aggressively avoid Wasteful Relationships, turn Neutral Relationships into Minor Value Relationships, optimize your Minor Value Relationships, and use Deep Value Relationships to catapult you up and to the right.
Optimizing your Minor Value Relationships means getting the help you actually need when you need it, without wasting anyone’s time. Every reasonable investor will happily provide specific support (recruiting, intros, strategy, UX reviews, etc) when asked. Skill-in-action here looks like diligence, shamelessness, and specificity in the asking. It also means (gently) holding your investors accountable for the things you ask of them and they promise to deliver. Pretty straightforward; do it.
Building Deep Value Relationships with your investors is a more difficult and important attainment. Cultivating such a partnership means expanding Minor Value Relationships and also, counterintuitively, flirting with the dreaded Wasteful Relationship. A dangerous path.
Why is this? Because deep value cannot be created without confronting the really hard, mission-critical questions; it’s in this confrontation that you arrive at your most ambitious visions, and solve your company’s most fundamental strategic dilemmas. And while working through those questions with an investor can be amazing, it can also easily degrade. To use a Buddhist metaphor: extreme waste is, ironically, the near enemy of extreme support.
My advice: Risk the danger. Find at least one or two investors who are up to the task of engaging with you on the most fundamental and most difficult questions.
When you’re running a company—no matter how gutsy and transparent you are—you are often subtly sheltered from these questions or incentivized not to ask them head-on. This challenge is present for entrepreneurs fast-tracking to failure, catapulting over the Green Monster with runners on all bases, and everything in between. A person you can trust as a collaborator on these questions in ways that are actually helpful and not just pestering, egoically-charged, or strategically banal is pure gold.
And for the investor, engaging with entrepreneurs around their mission-critical questions is not only the best way to make good on their investment but, I imagine (this is an entrepreneur’s conjecture), also the most fulfilling aspect of the work. It’s the tangible, grounding, hands-dirty antidote to the peculiarly passenger-nature of the job.
So, entrepreneurs and investors alike should aspire to turn their relationship into a sort of on-demand resource for action-focused, 100% relevant, deeply respectful, relentlessly realistic dialogue.
So, what—from an entrepreneur’s real-deal, in-it, let’s skip the bullshit perspective—do the fundamental questions that generate such dialogue look like?
The short answer is: it completely depends on the company. So, in lieu of a thorough list, I’m going to share a series of questions that I’ve recently seen generating rich, fruitful dialogue in conversations with early-stage tech companies. These questions are largely extensible across company stage, industry, etc.
Product
- Do people really love your product or do they just like it a lot? Nearly every failed startup is liked by tons of people. If you are still in the “like” stage, are you 100% focused on relentlessly iterating towards something that so decisively solves a market need or human longing that your product becomes truly beloved?
- Is your product development process (ideation, design, data management and analysis, roadmapping, engineering, testing, etc.) humming? In a shocking number of companies, product development is a nest of dysfunction. This isn’t necessarily a deal breaker, but when you nail your processes you unlock huge productivity.
Market & Growth
- Is the market that loves your product (not the market that just likes or is intrigued by it) really big enough to build a great business?
- Of your near-term and long-term growth strategies, which are real and proven, which are experimental and hopeful, and which are slightly (if excusably…we all need to dream) delusional? How are you determining and killing what’s delusional? Are you taking enough growth risks?
- What are your true LTV / CAC dynamics? Unit economics so often seem straightforward on the pretty ROI slide, but become extremely complex when you drill a few layers down (actuals v projected // segmenting by channel and demo // two-sided marketplace and long-terms SaaS complexities // changes in viral dynamics over time // percentage-based v absolute growth metrics // churn prediction algorithms // cohort-based changes including seasonality and other variants // etc.)
- Are you genuinely differentiated? Incremental improvements on an existing product, no matter how huge the market, usually mean that you are commoditizing something and fast tracking to price reduction, fiercely expensive competition, and a long slog. It can work, but it’s tough. (I bear this scar.) How are you cultivating in yourself hunger for radical differentiation (in product but also in growth strategy, company culture, etc.), despite the fears such independence and risk naturally inspire?
Execution & Team
- Are you spending enough time on branding, story, and vision — both internally and externally? When you really understand your brand (which is usually just an emotionally and strategically intelligent articulation of your vision) you have added to your army a drummer boy, a flag bearer, a cartographer, and a fortune teller. Seems obvious, but even in really successful companies it can be very hard to really know, feel, and stay maniacally focused on the truly important single thing you are building.
- Do you have a clear sense of where you have pure execution risk and where you face more fundamental creative risks? Examples of creative risks include having not yet found true product-market-fit, a scalable growth strategy, a scalable sales model, or effective monetization tactics. Almost every company has both types of risks, and each type calls for a very different approach; so understanding what’s what, tackling your risks accordingly, and not putting the cart before the horse is essential.
- Do you have a complete, intuitive, nearly paranoid understanding of all critical data inside your company?
- Do you have A+ talent where you need it? Are you properly prioritizing the task of finding the very best people? Are you ready to fire the people who are mediocre or detractive? Are you staying open (i.e. confident) enough to seek out the help you need to become a top 1% leader (yes, every leadership team needs help to fulfill their calling)? Are you doing what you need for yourself to sustain the drive it’s going to take to go all the way? And, perhaps most importantly, do you truly believe in what you are making?
.. and so on, you get the idea. I imagine that as I spend more time on the investor side of the table (I just recently began at RRE) my questions will evolve. What I’m sure won’t change is my conviction that it is deeply valuable for every entrepreneur to consistently talk through the really hard, mission-critical questions with people who are rooting for but not beholden to them.
