The 7 Commandments of Startup Investment. Advice from Robert Neivert, Venture Partner at 500 Startups

I came up with the title of this article before I began writing it, which hardly ever happens. And I was so proud of it too, before I googled it and found an almost exact version – what were the odds? I’m taking it in stride though, since it was published in the Stanford Social Innovation Review. It’s pretty cool and it’s written from the investor’s standpoint, so if you’re an investor you can check it out here.

If you’re a startup founder however, keep reading because you’re going to get some grade A advice from Robert Neivert, Venture Partner at 500 Startups who specializes in B2B seed investments.

His experience includes being an executive for startups having founded or worked at eight companies with four exits and four companies still operating. He was the CEO of the last two venture funded start-ups. He also has a wide range of expertise, having held leadership positions in product, marketing, and operations.

His academic credentials include a BA, BS, MS, and MBA degree from Stanford, Wesleyan, and Santa Clara. He is a Venture Partner at 500Startups, a mentor & advisor for Cardinal Ventures, Stanford iFarm, and Stanford’s Treehacks program as well as an executive advisor for over 15 funded startups. Add this to the fact that he previously held the position of Executive in Residence at Quest Venture Partners.

You’ll be able to meet Robert at How to Web Conference 2016 on November 1st & 2nd at the National Theatre in Bucharest (ticket prices increase on October 24th so hurry up and get yours here). Before that however, you’d better do your homework and read the piece of advice he has for you on how to manage the relationship with him as an investor (and with all the others joining the conference, for the record).

12307984_1187956024567180_1949450611081333802_oPreferred shares are not the devil, but be careful about how you give them.

Preferred stock or equity is defined by Investopedia as “a class of ownership in a corporation that has a higher claim on its assets and earnings than common stock. Preferred shares generally have a dividend that must be paid out before dividends to common shareholders, and the shares usually do not carry voting rights. Preferred stock combines features of debt, in that it pays fixed dividends, and equity, in that it has the potential to appreciate in price”.

Q: There is this whole debate about common and preferred equity: can you explain, from your point of view, how startups should choose one of them according to market, growth stage and so on, when raising money?

R.N.: This is complex but the rule of thumb is this. Let investors have preferred, but manage the preferences carefully. Try to avoid double dipping (Participation) and multipliers on the payout, and split board voting and other onerous terms and preferred shares are a very useful tool.

Ask for the amount that will help you reach your next milestone, based on metrics and a plan of how to get there.

Investors will ask you questions like “Why are you doing this?”, “What motivates you?”, “How have you validated that there’s a need for your product?” and more, so they can get a sense of who you are as a company. This usually happens during the first meeting, but as you dive deeper they will want to see some key metrics to determine the health of your company. These can be price-to-earnings ratio, price-to-book ratio, debt-equity, free cash flow, price/earnings to growth ratio and others.

Q: We have many startup founders in our community, with significant investment rounds so far. What are the first things to do after raising investment to spend the money wise?

R.N.: If you are asking that after the round, you are already in trouble. You should be raising a round based on what you need to hit your next milestone, to hit that milestone you should have metrics and methods to get you there. But given the question, I guess my answer is, figure out your metrics so you know where to go.

12356826_1187956127900503_5307153734349025970_oLearn to manage your investors and get value from them, don’t let them manage you.

Former IBM CEO Sam Palmisano launched a pretty significant change in how the company set its goals and communicated them to investors, and he talks all about it in this article from Harvard Business Review. It will give you a firm grasp of how to treat your shareholders with transparency and listen to their point of view in a way that fits your strategy.

Q: How do investors work with startups in this respect? How do they support them to develop a growth strategy based on the money they just have raised?

R.N.: Depends on the skill of the investor. You would never hire someone to be your CFO who has no experience right? So figure out how they can help, and what skills they have. It sounds weird but your job is to manage the investors to allow them to help you achieve your goals, be careful they do not manage you.

You should be in the lead, yes they have requirements (updates every quarter etc.) but you need to figure out how to get value from them as well, so ask questions, see where they can help and get them to help.

Large companies don’t like the risk associated with startups. To collaborate with one, you have to make sure you match up your basic objectives.

Q: We speak a lot about startups and corporates working together. As an investor, how do you see this working and why do you think it seems so hard to put them at the same table?

R.N.: Because the rules are different. Large companies function very differently, have different rules, metrics, and objectives then startups do. So you have to work hard to match up their basic objectives before any real conversations and progress can be made. For example, risk is inherent in all startups, they accept it and just run with it. Risk is a big negative for more large companies and has to be mitigated often at great cost. So to do a project together they must first agree on how to handle the risk.

Shift your perspective in order to work with a large company.

As I mentioned in a previous article about fintech, the need for innovation has led startups to a point where they are actually needed and fostered by large companies. This creates a favorable environment for you to become a disruptor and get the support you need to reach your goals. But how can you make that happen?

Q: How can investors, and investment funds in general, boost this relationship in order to make big companies adopt innovation faster?

R.N.: Often times it is shifting the conversation from HOW you do it, to WHAT needs to be done. This allows the startup to solve the problem in a new creative way and the company to get a solution that works for them but might not be what they expected.

Both startups and large companies should get educated on how to work together.12356748_1187956144567168_7834680610015756174_o

Q: For the European ecosystem to grow, what do you think should be done in terms of partnerships between organizations, startups and big companies, and other decision makers in the industry?

R.N.: I think there is a lot that can be done but one of the first steps is to get companies to realize they use startups to solve their problems. This can be done with education, events, etc. The second part is help train startups on how to work with large corporates so they know how to respond and how to work with them without crushing the company. So I would say, events are useful, but they need education components.

Don’t pitch your company when you first meet an investor.

Q: Many startup founders will be attending How to Web Conference. How do you recommend they approach you (and investors in general) during networking for example, in order to be memorable?

R.N.: Less information but say it succinctly. Be very short, tell me what you are doing. Just remember I get pitched many times a day, so the real purpose of the event is to get a meeting, not to pitch me the company. I am not going to remember the company, but if your high level overview is interesting I might set up a follow on meeting.

Feeling a bit more knowledgeable about getting an investment for your startup? Now let’s find you an investor and get you connected with some of the best European tech startups at How to Web Conference 2016.

The clock is ticking! Remember to get your ticket by October 24th and see you soon!

Add your comment