How to check founder-investor alignment before you start fundraising – TechCrunch

Like the flood of pandemic-era venture capital recedes, startups must avoid the scarcity trap that accompanies investors’ hunt for lower dollars. And as the markets turn, founders need to remember the fundamentals they learned in times of plenty.

Investors pull back as fears of a recession grow. In the first quarter of 2022, global venture capital funding decreased by 19% to $143.9 billion from the previous quarter’s record high, according to CB Insights.

Whether you’re looking for angel investors to start your business or later-stage funders to help you scale, the partners you choose today will affect the future of your business, from how you run your business to day to day to your exit strategy. That’s why it’s important to choose investors who are a good fit and have a track record that shows how they might act when the tokens are down.

It is crucial to understand who your partners are before you leave them in the tent. Below, we’ll discuss key factors startups should consider when evaluating investors in a changing landscape.

Kick the tires and get referrals

Check with a potential investor’s portfolio companies, current and past, to see what their experience has been. You’ll have to do this without violating nondisclosure agreements, but a key question is how investors have fared in previous downturns. For example, in the second quarter of 2020, when COVID-19 upended the global economy, did they provide portfolio companies with a bridge through uncertain times or tell them to find their own money?

Early in the pandemic, investors at a venture-backed technology company we were working with helped the company manage expenses, but initially refused to write checks. They also attempted to use their blocking rights to prevent other investors from backing the company, then offered it a list of terms significantly lower than the offer they had blocked, attempting to gain control of the company. ‘company.

Choosing the right partner for the right stage of your business can be the difference between building a billion dollar business and losing control of the business.

We were able to work with the company to prevent this from happening. But these were people with sharp elbows, and the company was aware of information in the public domain involving these same investors that should have been noted. Be aware of these signs if you come across them during your due diligence.

So what can you do? Check with your network (including your lawyers) and the investor’s existing portfolio to see what kind of reputation an investor or fund typically has and what kind of value they have added to the businesses they have backed. You can also ask the funds for a reference to a portfolio company where their investment didn’t work out.

Talking to the CEO of a company where things didn’t go as planned can shed light on how an investor behaves under difficult circumstances. Like everyone else, investors have reputations and leanings, and that’s information that’s available to founders, if they’re inclined to look.