The Founders Guide to Leveraging Your Cap Table
The Founders Guide to Leveraging Your Cap Table
In this edition of The Braintrust, eight unicorn founders unpack how they optimize their investor relationships.
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We live in the age of the party round. As the tech ecosystem has grown and barriers to private investment have fallen, startups are accommodating increasingly crowded cap tables. Alongside name-brand funds sit an array of boutique firms, solo capitalists, and angels.
Because of that diffusion, it can feel harder than ever for founders to leverage the value of their investor base. Rather than having one or two trusted parties to go to for advice or introductions, there are now dozens of backers with disparate skills, interests, and networks. Considering that some of these investors may subtract value rather than add it, it becomes even more difficult to know how to wrangle stakeholders. The rise of venture firms that explicitly avoid providing hands-on help (See: Tiger Global circa 2022) is in partial response to the sense that cap tables are mostly moribund.
While there are certainly useless and vampiric venture investors – just as there are fumbling leeches in every profession – many are equipped to come good on their promise to AddValue™. For savvy founders, the challenge is optimizing this base, leveraging it to raise your next round, find your next killer hire, and avoid the pitfalls of those who have come before you.
This is the topic for today’s edition of The Braintrust. Eight unicorn founders have shared their answer to this question: how do you optimize your investor relationships? Their reflections provide tactical insights for planning your fundraise, making specific asks, developing long-term partnerships, and avoiding “pain in the butt” funders.
For investors, this edition should help you level up your game. You’ll hear what “small things” matter greatly to founders, learn why having a brand matters, and understand why we could take a tip or two from Stripe’s John Collison and Sequoia’s Bryan Schreier.
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In brief
If you only have a few minutes to spare, here are eight highlights from The Braintrust’s contributors on how to optimize your investor relationships.
Avlok Kohli recommends raising from investors that help address specific risks.
David Hsu explains why experienced entrepreneurs can be invaluable investors.
Christina Cacioppo shares the “small things” that great angels do.
Mathilde Collin outlines how to make a good specific ask from your cap table.
Trae Stephens suggests treating “value add” investors with caution.
Immad Akhund warns against treating investors as authority figures.
Pedro Franceschi relies on investors’ experience to help solve novel problems.
Jack Altman notes that backers need context on the business to offer impactful advice.
Read on to discover the full list of tactics and strategies.
“You can see the impact of someone with a brand versus someone without one”
Avlok Kohli, CEO at AngelList
Not every investor is made equal. If you talk to startup founders, you’ll often hear that there’s a lot of dead weight on their cap table. As a result, the first step in optimizing your investor relationships begins with picking the right ones. You want to consider your company’s problems and build a cap table to address them.
One thing that can help is creating a matrix with the risks you want to solve as a startup on one side and the investor experience that would help address them on the other. You can then methodically build a pipeline of investors capable of assisting you. For example, through this process you might realize that a key risk is signing your first big industry player. To mitigate it, you could approach the CEO of a target customer and ask if they want to invest and act as a design partner. Assuming they agree, you can then use that connection to build product credibility and streamline future customer acquisition.
Once you’ve built your cap table, there are different ways of leveraging it depending on the maturity of your company. From the pre-seed through the Series A, establishing credibility is one of your core challenges. In that case, it’s helpful to have investors with brand recognition. Someone like Naval is a brand name, for example. Sequoia is a brand name, too. These partners help establish your credibility.
The same investors that are useful with one challenge might not be equipped to handle another, of course. You want to think about which investor matches the problem you’re trying to solve. For example, while Naval would be a great person to help with brand recognition, he’s probably not the right investor to call if you’re dealing with a very specific engineering issue.
Brand recognition can be especially useful when it’s time to raise the next round of funding. I’ve witnessed this firsthand; you can see the impact of someone with a brand versus someone without one in the conversion rate from an introduction to the first meeting being scheduled. My friend and former colleague Gokul Rajaram is a great example of a hyper-connector with strong credibility. He’s been an executive at legendary companies, so the conversion to a meeting is much higher than average when he makes an introduction. He comes to mind when I think of high usefulness among investors.
As your company grows, your needs change. By the Series B, you've ideally hired people to address most of your major needs. There’s more structure. There are more people around the table to help you. That means you don’t need to rely on the broader investment base as much, though you still need support from the investors on the board and compensation committee.
At this stage of a company’s life, investors can be effective in evaluating and closing very specific senior hires. These people might have hired dozens of people for a given role as entrepreneurs in the past, or they’ve seen another company go through the same process and can bring those lessons to bear. They can be a helpful sanity check that the person you’re assessing has all the characteristics you need. Jeff Fagnan has been particularly helpful for us at AngelList in this respect.
“[John Collison] was our most helpful investor from $0 to $10mm ARR”
David Hsu, Founder and CEO at Retool
We’ve found that while most investors aren’t helpful, a few have been company-trajectory-changing for us. When I think about why these specific investors have been so helpful, I think it comes down to a few reasons:
The investor has the requisite experience.
The investor is aware of her limitations and position.
The investor and the founder have a relationship that works (for them).
I’ll walk through two of our most helpful investors with each of these criteria.
The first is John Collison. He was our most helpful investor from $0 to $10M in ARR. I'd credit him for 10% of the reason we made it to $10M ARR. (10% might not sound like a lot, but it is quite a bit for an investor who is outside the business.) John first invested when Retool was just getting started, and we had less than a handful of customers.
Why has John been so helpful? I think the fact that he has started (and is running) a startup a few years ahead of Retool gives him quite a bit of expertise in the problems that we're currently encountering and are about to encounter. For example, one challenge we had in the early days of Retool was thinking through the structure and importance of go-to-market. For a developer-centric company (such as Retool or Stripe), the traditional wisdom was to eschew building a go-to-market function and rely on product-led growth. (And that is, in fact, what Stripe did.) But there are tradeoffs. When we understood what tradeoffs there were, we decided that it made sense for Retool to build a go-to-market organization earlier. This saved us quite a bit of time and pain and allowed us to generate revenue (and, therefore, be a much healthier business) much sooner.
The second is Bryan Schreier. He’s been our most helpful investor at scale and is the first person I go to when there’s a hard problem in the business today. Bryan invested in Retool when we were four people and around $1M in ARR.
Why has Bryan been helpful? He’s had the requisite experience, for one (after seeing a few startups succeed, as well as a few fail). But Bryan has an incredibly low ego and is well aware that he’s outside of the business. While that makes it easier for him to notice some things, it also makes him less aware of others. He and I agree that there are certain ways an investor can help and many ways they can’t help (and therefore those are the responsibility of the founders or the management team). For example, while Bryan is always interested in and willing to discuss product strategy, he realizes that he’s probably not the best person to be giving advice on it. That’s what the management team should be thinking about, not him.
“A double-digit percentage of our early customers were a direct result of his introductions”
Christina Cacioppo, CEO and Co-founder at Vanta
In Vanta’s early days, our most helpful angels tended to be operators who weren’t working full-time. Whether they were taking a break between roles or had decided they didn’t want to operate any longer, they had the time, headspace, and flexibility to do work that moved the needle for us. And because they had recently been operators, they had a sense for what that work was, even when we hadn’t learned to articulate it yet.
A couple of specific, seemingly small things that mattered a lot:
Replied to emails and texts in < 30 minutes: They replied quickly and directly. A sentence sent 18 minutes later was always more helpful than a three-paragraph discussion a week later.
Pitched candidates on Vanta with specifics: Our most helpful angels were willing to get on calls with me to learn about the role, candidate, and pitch and then called the candidate quickly thereafter. Because they weren’t running their own seed funds, they didn’t pitch other companies to candidates “if Vanta didn’t work out.” (At the earliest stages, you already feel like you’re pushing boulders uphill as a founder, so even a hint of competition from your investor’s portfolio can feel alienating.)
Didn’t ask for information they didn’t need: They understood that when founders are creating a new market, very little else matters. While a one-year financial model can guide early-stage businesses, it’s a distraction if you don’t yet have something people want. The most helpful investors didn’t ask us for these accoutrements of company building.
Asked all the founders they met with about the problem we were solving: Early-stage investors meet with early-stage startups all the time – it's their job! When Vanta was starting, startups didn't get SOC 2s, so it wasn’t top of mind for anyone. One of our investors asked everyone he met with if they knew of SOC 2, and he made an introduction if they seemed even the least bit interested. A double-digit percentage of our early customers were a direct result of his introductions.
“Be very specific in your asks”
Mathilde Collin, CEO and Co-founder at Front
Here are a few things I’ve done that have worked super well:
Firstly, send regular investor updates. The more context your investors have, the more likely they’ll be able to help. (Communicating regularly and transparently with your investors also has the added benefit of keeping you accountable for working towards your goals.) I’ve written a blog post where I share a template for investor updates. (Link to post.) In addition to these updates, I’ve also sent our investors the recording of Last Quarter at Front (LQAF), a quarterly presentation I do for the company that covers performance and learnings from the previous quarter and previews the quarter ahead.
Secondly, be very specific in your asks and make it easy for them to help. This seems fairly self-explanatory, but I’ll share some examples of what this looks like.
Something that would not work: “We’re building a customer operations platform, and we’re looking for more customers. Any company you can introduce me to would be helpful.“
Instead, here is what’s most likely to yield results: “Here are 20 logistics companies we’d like to get in touch with, and within these companies, here’s the right point of contact. If you have any shared connections on LinkedIn, could you let me know? I will send a forwardable email.” (Then send an email they can forward.)
When in the late stage with a prospective customer, I send an email to our investor mailing list saying: “X is thinking about buying Front. If you have a relationship there with A, B, or C, let me know, and I will send a forwardable email.”
Finally, having a weekly or biweekly call with one of your main investors can be very beneficial. I’ve had this with Bryan Schreier at Sequoia for a very long time. It’s helpful because he builds context over time, and then it becomes easier and easier to provide value. Also, it’s just a good way to step back from the day-to-day.
“There is often a direct correlation between investors who claim to be hands-on and value-add and investors who are a tremendous pain in the butt”
Trae Stephens, Executive Chairman and Co-founder at Anduril
If a startup works, it’s almost certainly not going to be because of its investors. If an investor is better able to run the company than the founders, they probably shouldn’t be investing in it (this is literally the central thesis of Founders Fund).
It is much easier for an investor to extract value from a company than it is for them to add value. The best investors are highly responsive to requests from founders (advice, introductions, surfacing exec candidates, etc) and introduce minimal friction in doing so.
There is often a direct correlation between investors who claim to be hands-on and value-add and investors who are a tremendous pain in the butt. Be skeptical about the claims being made by investors during fundraising, and be stubborn with giving up governance/control.
Share information as transparently as possible and invest time and effort into building personal relationships with your investors. Done right, you’ll be in business together for a long time. Don’t take money from people you wouldn’t want to hang out with socially.
“I think most investors would probably actually see it as a negative signal when they’re treated as an authority figure”
Immad Akhund, CEO and Co-founder at Mercury
The biggest thing that it’s important to remember is that the entrepreneur sets the tone of your relationship with an investor. When you’re younger and more inexperienced, like I was at my previous company, you might treat investors more like a teacher or parent or some other authority figure. You can end up having this relationship with them where they feel like the boss or you take everything they say as gospel. And it’s not a super healthy relationship because:
Your investor doesn’t really know that much about what’s happening in your company on a day-to-day level, and you need to be able to take their advice as just one data point of many that impact your decisions, and…
It creates this kind of barrier where you can’t collaborate with your investors because you’re trying too hard to portray the best image of yourself and your company, so you’re not being very transparent or authentic with what’s happening all the time.