Navigating the VC Landscape?How to Choose the Right Investor for Your (Constru-Tech) Startup

This week on Practical Nerds - tl;dr

• 90% of VCs add no value, and 70% actively harm your business
• Eliminate VCs that stand in your way, avoid harmful advice, and don't over-prioritize value-add
• Getting the above sequence right is critical; starting with value-add in your prioritization process can lead you into VCs who might be harmful in their advice
• Probe for an investor's true superpower
• Finding a partner you can have genuine fun with makes your journey so much more enjoyable

"Don't think about value-add as your very first criterion. Think about no harm, not standing in my way, not giving me shit advice as opinions or worse forcing them actually onto me. AEC is so specific, has so many quirky, that generic advice has proven to be harmful in the early days many times."

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Step 1: Eliminate VCs that will stand in your way

When choosing a VC for your constru-tech startup, the first step is to eliminate investors who will stand in your way. According to Vinod Khosla, 90% of VCs add no value, and 70% actively harm businesses. In B2B, this ratio is even worse. Make sure the person you pick won't impede your progress or force their opinions on you. As Patric Hellermann emphasizes, "Don't think about the brand at first. You can add that layer later. Don't also as the very first criterion think about value add. As the very first criterion, think about no harm, not standing in my way, not giving me shit advice as opinions or worse forcing them actually onto me." Don't prioritize brand reputation or perceived value-add at this stage. Focus on finding an investor who will let you navigate your startup journey without unnecessary interference. Trust your instincts and do thorough research to identify potential roadblocks early on.

Step 2: Avoid harmful VCs

Next, ensure the VC won't give you detrimental advice. Seek out investors who understand your vertical and can provide valuable insights without overstepping. References are crucial - do your due diligence on the individual, not just the firm. Look for a track record of successful collaborations and a deep understanding of your industry. Avoid investors who are prone to giving generic, one-size-fits-all advice or who lack the necessary context to make informed recommendations. As Shub points out, "If the kinds of conversations you're having seem like they're being read off as generic script or like a standard templatized chip process checklist, which a firm would run. You're probably not getting a flavor for either the person who's diligencing you or the firm and that's not a good thing because that process does not account for your bespoke nature, your unique pattern and therefore it will not appreciate your unique strengths and weaknesses as a firm and your areas of improvement in the future." Remember, the wrong advice can be more harmful than no advice at all, so be selective in who you trust to guide your constru-tech startup.

Step 3: Consider value-add, but don't over-prioritize it

While value-add is important, don't make it your top criterion. First, focus on finding an investor who won't stand in your way or give harmful advice. Only then should you consider the potential for value-add. Remember, no investor can constantly provide game-changing insights. As Patric notes, "It's very unrealistic to expect a trajectory changing moment, a value add moment every week, every point of, you know, every touch point, every month, etc. It's just not how your company is going to develop." Be realistic in your expectations and understand that value-add often comes in sporadic, targeted doses rather than a steady stream. Prioritize investors who have a proven track record of providing strategic guidance and opening doors to new opportunities, but don't let the promise of value-add overshadow the importance of finding a compatible, trustworthy partner.

Step 4: Probe for an investor's one true superpower

Ask potential investors about their personal superpower that you can count on. If they give broad, generic statements or cite their brand, it's a red flag. Look for specific, relevant expertise that can make a difference at critical moments in your journey. As Patric suggests, "Tell me what you will tell me in the future that you have no competence on. Tell me now. And if a person actually can't give you a specific answer, I would say run. Because that means that either best case they haven't reflected about themselves and they haven't discovered it yet. That's not good, but it's still the best case." Dig deep to uncover the unique skills, knowledge, or network that an investor brings to the table. This could be a deep understanding of your target market, experience scaling similar businesses, or connections to key players in your industry. By identifying an investor's true superpower, you can better leverage their strengths to support your constru-tech startup's growth.

Step 5: Find an enjoyable long-term partner you can also have fun with

The founder-VC relationship often lasts longer than the average marriage. Choose an investor you enjoy working with and who makes the arduous process more fun. The right partner will support you through the ups and downs of building your constru-tech startup. As Patric emphasizes, "The process is arduous enough. You shouldn't spend it with people who actually don't make you enjoy that process. Seriously, just, I can't overstate how useful that criterion actually is." Look for someone who shares your vision, values, and sense of humor. Building a successful startup is a challenging journey, and having an investor who can help keep morale high and maintain a positive outlook can be invaluable. Don't underestimate the importance of personal chemistry and compatibility when selecting a long-term partner for your venture. Shub highlights the importance of investors who can provide emotional support and act as a sounding board for founders, particularly when discussing the personal sacrifices and challenges that come with entrepreneurship, saying, "For example, with some other founders, believe it or not, I've even evolved to just being like a philosophical coach or almost a therapist sometimes. I'm not kidding. I do play that role with one of the high performing companies where I've actually gone in saying, hey, you know what? Business is phenomenal. There's no need to discuss that. Let's talk about how you're feeling."

Step 6: Remember that company building experience doesn't always translate, and can be detrimental in times of adversity

Be wary of former unicorn founder-operators turned VCs. When adversity hits, they may think they can fix the problem but lack the necessary information. This can lead to over-involvement and create additional challenges for your business. As Patric warns, "They could potentially be terrific founders again, but then you need the amount of information that you have and you need the governance for it to work, right? So but the problem here is that you will have someone that will want to get involved 10 out of 10 times, but they have 100 to 1000 times less information than you and that creates a very troublesome cocktail of adversity where you already have adversity in the business. And now you have adversity coming from the other side as well." While their experience can be valuable in some contexts, it's essential to recognize that every startup is unique, and what worked for their previous venture may not apply to yours. In times of crisis, you need an investor who trusts your judgment and supports your decisions, not someone who tries to take control based on their past successes. Seek out investors who have a track record of navigating challenges alongside founders, rather than those who attempt to dictate solutions.

Step 7: Be pragmatic but also constrained about angel investors

When it comes to angel investors, be pragmatic but constrained. Categorize them into vertical angels (for industry-specific insights) and company-building angels (for functional expertise). Don't expect too much value-add, but appreciate the potential for one or two trajectory-changing moments. As Patric advises, "In general, I think actually the value at you founders get from angels is actually way worse than what they are expecting from VCs. But it doesn't matter if there's like one moment in my in my company's life where against that that check from an angel, I can I can cash in and I can get one great piece of advice or one great introduction. It's absolutely worth it." Be selective in the angels you bring on board, and ensure their expectations align with your needs and goals. Look for angels who have a genuine interest in your constru-tech startup's success and are willing to provide targeted support when needed. However, be cautious about giving too much influence to angel investors, as their objectives may not always align with your long-term vision. Set clear boundaries and maintain open communication to ensure a productive relationship.

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Companies mentioned in this episode

• Khosla Ventures

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Shubhankar Bhattacharya

Patric Hellermann

Tags

#vcadvice #venturecapital #startups #vc

#practicalnerds #aec #founders #startup