How to Cultivate VC-Entrepreneur Relationship That Will Pay Dividends
An essay on trust, commitment and straightforward relationship with failure
During deal negotiation process, it can be easy for venture capitalists to hyper-focus on codifying contractual covenants between ourselves and entrepreneurs, putting substantive relationship-building on the back burner. While tempting, this approach is a grave mistake: to succeed as a portfolio manager long-term, it’s critical to strike the right balance between control and trust, investing in relationships as much as in companies themselves.
Indeed, no information rights can substitute great relationships built on trust and transparency. While less immediately tangible than formal control mechanisms, good cooperative VC-founder relationships deeply affect the returns of venture capital investment — exchange between the two is a perpetual cycle that can either drive the venture to success or cause it to stall out.
A trusting relationship begins with establishing the core understanding that in the big picture, our interests are perfectly aligned: we both want the company to be wildly successful. Though we may disagree on processes and tactics, we still share the ultimate goal of maximazing business value and achieving maximum possible impact. From here, we can then build a foundation of trust along the following key pillars, cultivating productive, collaborative relationships that deliver long-term rewards:
Commitment and consistency. In the starkest possible terms, the COVID-19 crisis has shown us the value of committed, consistent relationships that possess the mutual trust necessary to weather cataclysmic external shifts — a valuable lesson to apply long after it is over. I think about venture capital as a customer service business with multiple sets of interconnected customers, including LPs, GPs, and entrepreneurs. When we enter into a VC — entrepreneur relationship, we’re not just wiring money; we promise to be a supportive team player and a value-add partner, because VC money is too expensive if no additional value comes with it. It’s easy to be a cheerleader when companies are flush, showing hockey stick growth, raising capital and everything is awesome. When life happens and the going gets rough, however, you can see what a collaborator is truly made of — their behavior at this juncture speaks volumes. The best VCs never compromise long-term relationships for the sake of a short-term win.
Principles. Sooner or later, conflict is inevitable in any relationship, and — when handled effectively — can be a force for catalyzing positive change. Being grounded in a firm set of principles helps immensely in coming to a productive resolution and enabling conflict to move us forward rather than push us back. I highly recommend Ray Dalio’s Principles on this topic: he explains beautifully that although we can’t anticipate every possible disagreement or every potential conflict, we can create a set of guiding principles aligned with our values and modus operandi. Clear shared principles provide critical groundwork for navigating challenges in a highly uncertain environment, and force us to keep self-interested, short-sighted behavior in check.
Building competence. In my experience of managing cross-border portfolio of early stage companies in South East Asia, Europe and USA, compentence is less about what you already know and more of maintaining an inquisitive mind, continual learner’s mindset and relentness desire to challenge your own assumptions. For an early stage VC, particularly who is not thesis driven and operates on multiple markets, to win deals and to partner with best entrepreneurs it’s critical to rapidly build market knowledge base (including industry dynamics, competitive landscape and trends) and network of contacts, bringing prior experience to bear on recognizing common patterns.
Empathy and active listening. Closely related to the above point about staying open to deep learning, it can be easy for VCs — particularly managers who may have spent years as successful operators before getting on the other side of the table — to get locked in to rigid understandings and discount founders’ perspectives. The ‘curse of knowledge’ is real: though we wisely rely on past experience to make decisions and provide advice, our interpretations of this experience can often be biased (here’s a great article about that). This can also easily slide into didacticism, harming mutual trust and closing both parties off from innovating their thinking. Mastering active listening skills can be an invaluable tool in shifting this tendency and moving towards enriching exchange between VC and founder; offering guidance through the lens of an entrepreneur will help to mitigate confirmation biases. Healthy paranoia is great, but last thing you want to do is to be blinded by your own experience.
Open and transparent communication. Reliable, frequent, and accurate communication deeply affects the quality of relationships. Giving honest feedback in a subtle, constructive way is a skill that absolutely has to be mastered; the goal is to productively engage to develop effective solutions together, not putting founders on the defensive. As VCs manage a wide portfolio of investments, we are generally less dependent on a particular founder and it can be easy for us to succumb to an illusion of power and slip into a boss/employee mode of communication — an uneven dynamic that can fast erode mutual trust and respect. Maintaining an open line of communication as peers and equals is essential to building strong, lasting funder-founder relationships.
Founder / funder fit. As in all relationships, choosing a compatible partner is half the battle: discernment is key, as there is no one size fits all approach to forging mutual trust. Just as there are many distinctive types of corporate culture, so there are widely differing personality profiles among venture capitalists — choose your investor wisely. The most selective entrepreneur will target a specific partner within a VC firm, and her experience will be just one of many selection criteria. As a founder, you are getting yourself into a binding relationship more binding than marriage that has deep potential repercussions far down the line in your career. As such, it’s more than worth investing serious time in understanding whether you have shared values, principles, attitudes, standards and beliefs. In other words, your premises and principles should match. It’s possible to resolve the toughest conflict if both parties are aligned at the core.
Straightforward relationship with failure. It’s natural to celebrate successes and condemn or fear failures, particularly in emerging markets. I’m intimately acquainted with this deep-seated cultural bias: as someone who grew up in Russia, where failure was never an option, I had hard time learning to accept failure as a necessary part of the learning curve that produces eventual success. Understanding this was a long personal process of deep, genuine reflection on all the major mistakes I’ve made both as an investor and a human (I even made reflection on the importance of failures a theme for my entry essay to Stanford GSB), intentionally developing an open and resilient relationship with failure. To me, the choice was simple: to either learn to admit, accept, and learn from failures, or get a job in another industry. There’s no way to succeed in venture capital otherwise, where the rate of failure to exit is around 97% at seed stage as I wrote here. While we always aim for success, moving through setbacks and using them to sharpen our knowledge, understanding, and judgment is critical to developing lasting trust in our relationships.
All this being said, it’s important to note that trust is distinct from faith: while the former is based on shared values, demonstrated mutual respect, and integrity, the latter clouds judgment, forces us to surrender our skepticism and reasoning, and diminishes our ability to see red flags early. While faith requires no evidence for belief, trust is the core conviction of judgment based on knowledge, instinct, and experience; it’s not unconditional, and continually grows and evolves with time and care.
I am convinced that founder-funder relationships are governed by many of the same principles as our social relationships at large — with partners, friends, family, and beyond. Being a reliable and trustworthy partner is of paramount importance to me both professionally and personally: trust is a core value in my family, one that makes it possible for me and my three daughters to be comfortable in our relationships, rely on one another, and give each other freedom while holding each other accountable. In all realms of our lives, the dividends of taking time to build genuine trust are immense and yield rich long-term returns; it’s worth investing in early and substantially.