Why Founder-Investor Alignment is Critical for StartupsApril 20, 2020
After having been rejected by dozens of angel investors, it can be tempting for an entrepreneur to accept a deal from the first angel to make an offer. Getting funded by the wrong angel, though, can have disastrous consequences -- both personal and economic. Entrepreneurs who don’t place enough emphasis on founder-investor alignment may end up spending all their energy fulfilling someone else’s vision. Particularly for entrepreneurs who left the 9-5 world out of a desire to take charge of their own destiny, the resulting lack of motivation can end up destroying a startup. Failing that, founders may find themselves pushed out of their own company. With that in mind, what can do to you ensure your angel investor understands and agrees with your vision?
1. Choose an angel investor who understands your sector
It’s not that an angel without in-depth knowledge of the sector will actively sabotage your business. Obviously, it is in everyone’s best interests for your startup to succeed. However, if your angel investor has a history of working in your sector, there’s a much higher chance she will understand the pain-points in the industry and how your vision can lead to a successful trajectory for the company. With sufficient insight into the sector, she will also understand costs, time-to-market, and the potential pitfalls faced by your startup. This puts you and your investor eye-to-eye right from the start.
Of course, there is another very important reason to choose this kind of “insider” angel: connections. An insider angel is much more likely to be able to put you in touch with the right suppliers, manufacturers, and even customers to help you expand.
2. Communicate your vision effectively
The challenge here is to highlight the large scope of your vision while also demonstrating that you are tightly focused on a realistic, near term, go-to-market strategy. Perhaps counterintuitively, the best way to do that is to start by zooming in on a specific customer. For example, “Our target customer has ABC characteristics and faces XYZ problems.” Next you should explain how you solve that customer’s problems while providing your specific, near-term go-to-market plan for that customer. After you’ve established that, you can zoom out on your plan to tackle, for example, adjacent markets. Then you can zoom even further with your grand vision, which shows how your solution can be applied in other contexts and markets.
3. Define your shared vision on paper
It generally takes time for a vision and strategy to start paying dividends. In that anxious period before you start to see real traction, an angel who is not on the same page may pressure you to change course. However, the last thing you want is to be forced to switch to another strategy before the first one has had time to mature. This is why it’s important to define your vision and strategy clearly, then map out agreed-upon contingency plans. You may want to clearly state in the terms of your deal, for example, that the founder reserves the right to stick with strategy A for XYZ amount of time.
It’s also critical to consider the angel investor’s timeline. All investors go into a deal thinking about an exit. You need to make sure that your startup’s vision for growth is in alignment with the angel’s vision for how to liquidate his investment. If it is not, you may end being forced, for example, to sell to a competitor at a far lower valuation than you had hoped.
4. Include provisions for support in the terms of your deal
A good way to ensure founder-angel alignment is to make it a contractual obligation. While it may appear that you and your angel see eye to eye, that only way to be sure of that is by stipulating it in the terms. Write out what the support you expect entails and make sure to include a provision to advocate your position or get recourse if the promised support doesn’t materialize.
Defining and agreeing upon a shared vision from the start may be perceived as a time-consuming distraction. The process may even result in your startup not getting funded by an angel that otherwise seemed interested. If that happens, you should consider yourself lucky: you likely dodged a bullet. Ensuring investor-founder alignment from the start, after all, is essential for achieving long-term success.