Notes on personal diligence and investor communications

I'm open-sourcing my notes from two breakout sessions I led recently at the Village Global annual retreat for founders and emerging managers. ????

Topic A. Personal diligence best practices - e.g., how to evaluate which founders and investors to work with

#1 Get to know people across diverse settings

Zoom-based pitches tend to be highly choreographed, and it's relatively easy (with enough practice) for someone to crush it on a zoom.

But a person's zoom-self is not necessarily reflective of who they are day-to-day. And zooms give you very little insight in how they lead their teams, and what their teams really think of them.

To solve, spend time with founders in person, across multiple settings:

• in the office (ideally with a portion of their team)
• over a meal or beverage
• on a walk

Setting determines the headspace a person is in.

You'll get a much broader picture of their style as a leader this way, and get a better understanding of someone's motivations in a more casual setting (such as a dinner or a walk).

And most importantly, you'll get a sense for if they've earned the respect of their team (make sure to invite them along!).

If you can't get together in person for whatever reason, create different contexts virtually by stage-setting before a meeting: "Hey, for this zoom, I want to focus on getting to know you as a person and on you getting to know me as a person rather than chat about the company itself" -- and then come prepared with a set of questions on more personal topics that give you insight into who they are.

Ideally, both parties should share their answers to these questions during the meeting. If you share information about yourself on whatever topics you've picked, you'll get more from them too.

#2 Ask people about their expectations for your relationship

Many founders and investors set expectations for how they'll work together AFTER an investment has already been made. This is too late.

Ideally, if you do this BEFORE an investment, you'll get a sense for if there's really a cultural fit for you to collaborate.

But just asking 'what are your expectations for me as an investor' often will yield vague answers. It's best to ask this orthogonally. For example:

"What have been the things you've loved about your relationships with existing investors and what have been the things have been frustrating?"

You'll get much more interesting responses this way -- e.g., you'll get a view on if a founder is looking for an investor that's passive and stays out of their way, or for someone who can be a coach/mentor as they build the business.

#3 Work your way up the five levels of referencing

L1 - Doing basic front and back channel references

L2 - Asking the right questions on reference calls. Here's a great guide from Graham Duncan : https://grahamduncan.blog/whats-going-on-here/

L3 - Playing back your initial findings from references to the founder (or, if you're a founder, to your prospective investor), focusing on the areas that may present issues; this will give you a sense for how self-aware they are

L4 - Repeat L1 to L3 for the founding exec team too

L5 - Get first hand experience observing how they work if you can; the way we do this at MBX Capital is by introducing founders to prospective customers early in our process and being a fly on the wall as they build a customer/partner relationship

Ideally, do the above EARLY in diligence, rather than at the tail-end (when confirmation bias becomes a challenge)

Topic B. Best practices for investor communications and managing boards

#1 Consistency builds trust

An 'okay' company with A+ communication (and thus the trust of their cap table) will frequently be able to raise more insider capital than a 'great' company with bad investor communication.

Fear of sharing tough news with investors often leads to teams not being consistent about updates. But that tough news will come out eventually when you go back to those investors to raise more capital.

It's better to rip the band-aid off and be consistent about your updates rather than surprise investors later on. The trust you've earned by doing so will lead to more supportive insiders than if you had waited.

And if you're worried about someone leaking info, remind people that updates are confidential, put your updates on docsend, require authentication, and add watermarks. This takes less than 60 seconds and will dramatically reduce this risk.

#2 Give your board homework

Great founders use their boards to their advantage. A great way to do this is to assign them homework. To create a foundation where boards can do high-value homework, keep them in the loop between board meetings.

This can be as simple as just forwarding along internal threads on goings-on with customers, what's happening with product, etc. in real-time. These informal updates prime your board to be more useful than if they were waiting quarters to really 'get' what's happening with the business.

Use these informal updates to highlight areas where your board might be able to help you overcome blockers (e.g., figuring out how to get to the right decision maker at a partner).

And don't be afraid to say - "Hi [BoardMember], see below thread re issue [X] we are having with this customer. Can you help us with this?"

#3 Keep it simple

Updates do not need to be huge documents where you opine on everything in the business. A simple, 1 paragraph update with 5 key metrics is often enough, especially if you're sending it on a regular cadence.