One thing that constantly surprises me is that maybe 80% of venture-backed founders I know don’t know where they stand with their investors.
The bottom line is every professional VC firm and investing entity divides its investments up into 3.5 categories:
- Super Green Light. You want to buy every possible share, period, almost no matter what the price. See, e.g. Sequoia in WhatsApp. When you want to increase their ownership, and/or do “Super Pro-Rata” (invest more than your % ownership share) in the next round.
- Green Light. You are happy. You want to own more, at least if you can afford to. You definitely don’t want to own less.
- Yellow Light. You are worried. Company is doing OK, but not crushing it. It’s not clear it’s a winner. You want to be careful about investing further.
- Red Light. You are out. You believe your investment is a loss. Send the associate to the board meetings. Do not invest anymore, period, except in certain game-theory situations (total wash-out, pay-to-play, etc.).
If you are cash-flow positive, or have 24+ months of runway, if you want — you can ignore all this if you want.
But if you are going to need more money at any time in the remotely near future, first, you need to know:
- Will my existing investors invest more — period? How much?
- Will they invest more than their “pro rata” (Super Pro Rata), their pro rata — or less?
- Will my existing investors bridge me if I need more money, and there isn’t a new lead?
- Will my existing investors make intros for the next round? Who are these intros?
Folks. If you don’t know. Just ask. It is OK. It really is.
Go around the room each board meeting. At the end of the meeting. Put everyone on the spot. Have a slightly awkward discussion. It’s OK. It’s much better to know.
Ask how you are doing overall, 1-10. And ask about their appetite to invest more.
Putting your investors on the spot like this may sound unusual. But I think if you do, you’ll get an honest answer. Maybe even a more honest answer than if you ask 1-on-1.
And don’t ask 3-6 months before you are out of money. Ask every board meeting if you want. Definitely, start asking when you have 12 months of runway left. Don’t wait.
You need to know. You are CEO. Your job is to keep the engine fed.
Most CEOs are too optimistic. They think their investor NPS is higher than it is.
When I make an investment where I want to own more, you’ll know it. I’ll be asking.
(note: an updated SaaStr Classic post)
Published on April 24, 2023
