Control - Founder vs. VC

What the greatest technology investors say about Control - Founder vs. VC

Early Stage Technology Investments Come Down to 4 'M's'

Mark Suster Partner Upfront Ventures and former entrepreneur

“[] [Almost] all VC investments in early stage technology & Internet investments come down to just four key factors []: management, market, money [i.e., valuation] and above all else momentum [i.e., mostly product momentum]. 

[] The number one thing that investors get their checkbooks out [for is] momentum.  [Momentum has various definitions]:  user numbers, revenue, channel partners, biz dev deals, [etc.]. 

[] [Suster’s investment decision is based] 70% [on] management, 30% [on] product. 

[] [Almost] all VCs care about investing in big markets with ambitious teams.

[] Most VCs want to own between 20-25% minimum of [a] company. [] [Investors need to] own enough [equity] to make it worth their time – thus “money”. And all of this is wrapped up in forward progress that [entrepreneurs] demonstrate over time.”   Mark Suster, The Four Main Things that Investors Look for in a Startup,  October 6, 2010

http://www.bothsidesofthetable.com/2010/10/06/the-four-main-things-that-investors-look-for-in-a-startup/

Select the Highest Quality Investor Available

Mark Suster Partner Upfront Ventures and former entrepreneur

 Suster advises entrepreneurs to select the highest quality and most experienced investors available.   It’s generally better for the company long term to have the right investors vs. optimizing every last piece of equity up front.  “Worrying about giving up an extra 10% [equity] at [an early] stage can be meaningless if the ultimate outcome is either success or failure.”  Mark Suster, Raising Angel Money, July 19, 2009; http://www.bothsidesofthetable.com/2009/07/19/raising-angel-money/

Valuation is Temporary, Control is Forever

Naval Ravikant angel investor, Co-Founder AngelList and Venture Hacks and former entrepreneur

“Venture Hacks’ [] tagline was ‘Valuation is temporary, control is forever.’   It was all about [] mak[ing] sure [the entrepreneur] keep[s] control.  And if [the entrepreneur] ha[s] control then it’s [his] company.  And the day [the entrepreneur] loses control [] [he’s] an employee.”  Naval Ravikant, This Week in Startups: Naval Ravikant of AngelList - TWiST #244 Published on Apr 6, 2012,  @ 1:08 hrs http://www.youtube.com/watch?v=lWfGw7serN0

The Biggest Mistake Entrepreneurs make when Raising Money

Babak Nivi Co-Founder AngelList and Venture Hacks and angel investor

Nivi says “the biggest mistake entrepreneurs make when [] raising money” is that “[they] focus on valuation when they should be focusing on controlling the company through board control and limited protective provisions.   (Protective provisions let preferred shareholders veto certain actions, such as selling the company or raising capital.)

Valuation is temporary, control is forever.  For example, the valuation of [a] company is irrelevant if the board terminates [the founder] and [he] [loses his] unvested stock.

The easiest way to maintain control of a startup is to create good alternatives while [] raising money. If [the founder is] not willing to walk away from a deal, [he] won’t get a good deal.  Great alternatives make it easy to walk away.

Create alternatives by focusing on fund-raising: pitch and negotiate with all [] prospective investors at once. This may seem obvious but entrepreneurs often meet investors one-after-another, instead of all-at-once.

Focusing on fund-raising creates the scarcity and social proof that close deals.  Focus also yields a quick yes or no from investors so entrepreneurs can avoid perpetually raising capital.”  Babak Nivi, What’s the biggest mistake entrepreneurs make? , October 14th, 2007  http://venturehacks.com/articles/biggest-mistake; Why do investors want protective provisions? August 2nd, 2007;  http://venturehacks.com/articles/understand-protective-provisions

Investors Only Care About Returns & Control

Jason Mendelson venture capitalist and Managing Director Foundry Group

Generally investors only care about returns and control when making investments.

“[Entrepreneurs] should focus on terms like pre-money valuation, liquidation preferences, board of director elections, drag-along rights and protective provisions.   Most [other standard term sheet terms] aren’t really all that important.  [] Many of these terms have interdependencies and it’s important [to] understand how terms such as option pools, warrant grants and  the election of independent board members will affect returns and control.” Jason Mendelson, Do More Faster  by David Cohen & Brad Feld  copyrt 2011, Get Help with your Term Sheet  pg 238

Investors Only Care about Two Things

Jason Mendelson venture capitalist and Managing Director Foundry Group

“In general, there are only two things that investors really care about when making investments: returns and control.  Returns refer to the end-of-the-day financial return the investor will get and the terms that have direct impact on these economics.   Control refers to mechanisms that allow the investors to either affirmatively exercise control over the business or to veto certain decisions the company can make.”  Mendelson says that if an investor resists terms that don’t impact returns or control,  it may be a negotiating tactic, he may not be savvy or could just be a jackass.  Jason Mendelson, Do More Faster  by David Cohen & Brad Feld  copyrt 2011, Get Help with your Term Sheet  pg 238