Choosing an investor doesn’t necessarily change your goal, but it is like standing at a crossroads with several possible paths to success. As a founder, you make a conscious decision which direction gives the company the highest chances of becoming successful.
Becoming VC-backed has many perspectives to consider. Let's focus on two.
The financial perspective
From this perspective, there is usually a good alignment between the founder and the VC from the start. The founders and investors want to reach the next significant milestones after a financing round and put the company in an attractive position for the next round.
VCs aim to invest in startups with the potential to become unicorns or even decacorns. To achieve this, multiple financing rounds to fuel their growth are usually required — starting with early-stage VCs and then getting backed by growth funds before moving for an exit or IPO. The VC funds leverage their national and international networks to support the company and give them access to other (friendly) VCs. If the high goals shown during the pitch deck are reached and the company is on track, the valuation doubles in each financing round.
The legal perspective
The legal documents of the deal contractually define the relationship between the founders, the company, and the investors. These documents are long and complex and define many eventualities that could occur along the way of the venture. Most often, legal docs are negotiated once the parties have an agreement in place that they want to work together and build an amazing company.
For this topic, there is an imbalance at the negotiation table as VCs know these documents extremely well and have standard templates, whilst it is the first time founders see such documents. Both parties want to build a resilient company ready to weather storms and both want to mitigate their own risks. Especially at an early stage with this information imbalance and typically relatively low investment sums, this can lead to lengthy negotiations and highly individualised, non-standard contracts.
In a second or third round, as larger sums are invested, terms are generally set by the investor, retrospectively making the effort spent on negotiations in early rounds obsolete. Therefore, as startups choose to become venture backed from an early stage, one could argue that time and energy spent on negotiating terms could be better invested in building a great relationship with the VC and pushing the business forward together.
