As an early stage investor, finding a great company is only half the battle. As in life, in investing “it takes a village” as they say. And that is why companies are very careful about who they invite to be on the cap table. Certain investors can add a lot of strategic value to a startup, providing the “grown up in the room” to young teams by harnessing their experience through service on the board or in an advisory role.
Unless you want to be single handedly responsible for driving the growth of the company and an eventual liquidity event, make sure you have some high quality co-investors in the round. Beyond the ability to use their experience to help your founding team avoid startup pitfalls, experienced value add investors can also help the company find funding for follow on rounds.
There are a lot of great reasons that experienced, well-connected coinvestors can increase the attractiveness of the investment opportunity you are evaluating, but we will cover the top 5 reasons here.
- A great lead investor is your advocate on the board. Wondering who is going to look out for your interests as new money comes in and the company continues to grow? Hopefully it will be the board member who represents your investor class. If he or she is a well known and well-connected investor, they are more likely to be able to maintain the board seat even after the company is no longer a “start-up”. And at that point, you’ll be grateful to have someone in your corner whose financial interests are aligned with yours.
- You probably got decent investment terms. There are a lot of “investors” out there who have deep pockets, but little sense when it comes to the market. And this includes not just coming in at a reasonable valuation, but negotiating for all the investor protections that can help ensure a return of your capital in case things don’t work out as planned.
- A well-lit path to exit. Successful startup investors have usually invested in companies that are now big successful companies; often with a lot of cash or stock purchasing power. These investors may be on or have friends who are on the boards of potential acquirers. It increases the visibility your investment has from potential buyers, potentially getting you to exit faster and more smoothly.
- Future Opportunities. Investing is all about relationships, and who is in your inner circle is often a factor in what kind of opportunities you will receive in the future. Start to build a portfolio that increases your network of savvy investors, and you may find yourself with a seat at the table in cases where others are struggling to get in.
- Follow On Capital Needs. It’s likely this isn’t going to be the only round the company needs to raise. Existing investors who have strong relationships with growth equity investors can make all the difference to the future of your investment. Once the company has shown traction and needs growth capital, great Seed Investors can help make that happen.Great investors also tend to have relationships with people who run companies that could potentially be acquirers of the startup you are investing in. And in the current closed IPO market, this is vitally important, as it is one of the primary sources of investor liquidity.