Of partners and investors

The most successful venture capital investors can sometimes be shitty partners to founders. The best partner for a startup may very well be a mediocre investor. Investors and partners, same VC but different roles.

At the origin of this dichotomy lies the venture capital business model. It is designed to serve two distinct patrons with two very different objectives. On the one hand, we serve our investors, called Limited Partners or LPs for short. On the other hand, we allocate their capital to portfolio companies and serve their founders.

Too many founders forget this distinction and end up choosing the wrong backers. I’ll explain why this happens and how to spot the VCs you want on board and those you would be better off avoiding. I’ll use investors for the role optimizing for LPs and partners for the role focused on founding teams. Deal?

A great investor for LPs provides consistent financial returns at an appropriate risk. A great investor sets an investment thesis and sticks to it. She is a good steward of investors' capital and reputation with professional underwriting, management, and reporting.

In contrast, a good partner for founders is a helpful and loyal ally. She’s there in the good and the bad times challenges you when you’re up, and encourages you when you’re down. Good partners don’t renegue on term sheets or negotiate terms just before a final close. Good partners don’t block rounds to get concessions. Good partners don’t micro-manage.

Good partners don’t give up before the founders.

A good illustration of the confusion brought by these contrasting roles is the conventional yet unproven maxim that entrepreneurs make the best VCs. Entrepreneurs indeed make great partners for founders, almost immediately, but do not necessarily provide great returns to their LPs. The reality is more complicated.

In fact, legendary investors often come from finance, tech, sales, and even journalism. Startup founders turned VCs are rare in the VC Hall of Fame. Some interesting empirical evidence illustrated in the following graph shows no correlation between performance and background. The data points show no trend.

The reason these two roles are relevant is that the incentives of LPs and founders are often misaligned. LPs prefer we buy low and sell high. Founders prefer we buy high and sell higher. LPs favor deep due diligence processes, founders favor no diligence at all. LPs monitor closely how VCs allocate follow-on capital, founders would love for automatic follow-ons to help them raise additional capital.

Being good or bad in any of these two roles is thankfully not set in stone. I wouldn’t be writing this from a VC firm otherwise, trust me. When I started, I was terrible at both! Not only can we grow as VCs but there’s often a correlation between being a good investor and a good partner. A positive feedback loop if you will.

And that’s another reason we often forget to distinguish between them. Some of the things that make one a good investor also make VCs a good partner.

For example, successful investors often have a great network of LPs and friends that they can tap into on your behalf. They attract plenty of capital and have deep pockets to support the most promising startups. They build a reputation for picking winners. This creates a strong positive signal for hiring, partnership and follow-on capital.

As for good partners, they build a reputation that allows them in time to become great investors for their LPs. The most obvious benefit for good partners is that the best founders want to partner with them. These VCs can choose from a better pool of candidates and win competitive deals at good terms.

Good partners are generally great team players. They often build solid syndicates of VCs that add value to their portfolio companies. Good team players know when simply get out of the founders' way to let teams strive and win.

The ideal of course is to find great partners that are also great investors. In my experience, these are the exception rather than the rule. It takes exceptional talent, experience, and luck. The VC craft may take decades to master.

One more thing.

What’s tricky and different about finding a founder-VC fit is that there is no ideal partner for all founders. It depends on the founders’ background, experience, values, and management style. What matters most is that you find the best partner for your team. That’s another reason that blindly going for the best investor and the shiny brand is misguided.

At the end of the day, it’s simple enough. Avoid shitty partners and go for the best, run broad reference checks, and trust your gut. Go with a partner that challenges you to dream bigger and work harder.

There are great investors and great partners out there, if you have a choice, go for the great partner.

Life is too short to partner with boring VCs - Oskar Hjertonsson, founder of Cornershop