Know the Mindset

This sounds obvious – make sure to know the mindset of your investors.  Typically, I think that most entrepreneurs raising VC think that the VC mindset is standard.  And it often is.  Invest at time X, grow company during time X+8 years, sell company (or less likely IPO) at some point along the way and create value for everyone.

Sometimes the investor mindset might have a shorter “sell” horizon.  If the company is already producing healthy revenues, the incoming new investor mindset might be “this company should be sold within 2 years – if not, it could get ugly”.  There are all sorts of variants on this theme.

In addition to the “entrepreneur to investor” relationship, the “investor to investor” mindset relationship is critical.  For example, if a co-investor (call it Fund Y) is a small fund and knows that it will not be able to keep up with it prorata investment share throughout the life of investment it would be critical for its co-investors to understand that going in.   It may explain why Fund Y tries to protect itself, via deal terms, from pay to play provisions that would kick in with respect to future financings.  Alternatively, if a company is trying to raise bridge financing and one of the existing investors (call it Fund Z) is pushing hard for downside protection that is well beyond normal, there may be justified/understandable reasons for Fund Z’s position.  Fund Z may not be a typical VC, but rather part of a larger organization whose underwriting criteria require the onerous terms in the given situation.  This could create a difficult negotiation, but at least the other investors and management team members involved, if they know the mindset of Fund Z, will not simply think that the folks at Fund Z are acting irrationally.  That is important.

Bottom line:  as an entrepreneur, make sure to understand the mindset of your investors.  Ask them.  And the same applies to co-investors in a multi-investor deal.  Misalignment of undisclosed mindsets can lead to truly uncomfortable outcomes and can seriously damage relationships.