While the aspect of capital seems rather obvious, early-stage firms must consider and research the true cost of the capital provided beyond valuation.
By Prasad Vanga
Good early-stage investors provide more than just capital. With a multitude of (nearly commoditized) capital available to founders, it is imperative for a founder to do as much due diligence on an investor as the investor does on the founder. There are three core types of value-add an early stage investor brings to a company.
While the aspect of capital seems rather obvious, early-stage firms must consider and research the true cost of the capital provided beyond valuation including terms such as voting rights, anti-dilution provisions etc., must be carefully considered while accepting capital.
Since late-stage investors expect at least the same, or usually better terms than early investors, a good early-stage investor can add value by investing on founder-friendly terms that make raising future capital at favourable terms possible. This is crucial since the terms set by early investors help determine the future fundraising potential for a company.
Be All Ears
Once the capital has been deployed into the company, investors can provide value by assuming the role of advisors and helping founders navigate the complex waters of business. The advice provided can take several forms depending on the experience and strength of the investor.
Technical advice relates to helping the founders select the best technology stack from the variety of options available to help build their product, providing constructive feedback on the product’s performance, or deploying internal resources to help founders tackle complex technical challenges wherever possible.
Business advice is the most commonly reported value addition of investors apart from capital. An experienced investor has seen multiple firms make mistakes, create winning solutions, and handle the ups and downs of a startup. Through these learnings, investors are positioned to help founders avoid costly mistakes, guide them towards better strategies, and make sound business decisions in times of uncertainty.
The advice can take the shape of helping founders sharpen their pricing strategy, providing market insights, weighing in on complex contracts, and so on. Investors help add value here by ensuring that the company takes full advantage of their relevant experience and understanding.
Operational support is also provided by some early investors (incubators, accelerators) by way of providing shared accounting, legal, sales, or engineering resources. In the early stages of the company lifecycle, this support is of immense value. As the ecosystem matures, and more sophisticated investors emerge, we will see the next wave of leaner, smarter startups benefitting from this experience and advice.
Connect and Grow
Apart from capital and advice, the third crucial value addition provided by investors is access to their networks to form connections that can help startups in numerous ways. Industry-specific connections facilitated by investors across the value chain can help drastically shorten sales cycles (since the connections formed are usually at the decision-making level), gain moon-shot corporate clients, or onboard partners that would otherwise be difficult to obtain. For example, if the investor has deep expertise and network in the healthcare industry, they can open the doors of major hospital chains to startups.
Investors can also help by providing connections pertinent to key talent — helping founders find and hire C- level executives, top engineers etc. Additionally, connections are made with other investors for further fundraising. It is a well-known fact that one of the best ways to get an investment is to be referred by someone within the investors’ network. The value-addition here is not just a referral, but a referral to the right investor.
Founders would be well advised to run basic litmus tests on the above to see if the investor is truly a value-added provider of capital. Is the investor providing favourable investment terms? Does the investor have a deep industry experience to help guide strategic decision making? How can the investors’ network benefit the company? Is there evidence of the investor making these connections for other founders they invest in? Positive answers to these tests indicate that the investor can provide value over and above the capital.
Early stage investors can, therefore, provide genuine value addition by helping startups scale with speed through access to capital, mentorship, and market access.
(Prasad Vanga is the Founder & CEO at India and Singapore-based early-stage startup fund Anthill Ventures. Views are the author’s own.)