Partners and Investors: Why every startup needs both

Venture capital today is dominated by two kinds of money: a partner mindset, and an investor mindset. Partners come with advice, wisdom, and bonus consulting that startup founders need desperately as they manage their fireball of a business. Fast money from investors is exactly what it sounds like: The investor mindset makes a decision quickly, closes the deal with both minimal fuss and distraction for the management team, and moreover with few-to-no strings or governance attached.

Battle lines in the venture market today have been drawn over how the product — money — is wrapped. Partners differentiate on brand and expertise; Investors differentiate on speed. There are funds full of smart people who can help directly with recruiting, sales strategies, and other sensitive issues. And there are funds that can write you a $100 million check with favorable terms by the end of the week. Thanks to the rapid expansion of fund sizes and crossover investors in recent years, 2021’s market reality made valuations of 200x or 400x revenue multiples acceptable. A frequent collaborator and co-investor, Peter Wagner at Wing, recently published an excellent market analysis called the Cannonball Effect that sheds light on the pace of recent dealmaking.

Is one type of money ‘better’ than the other for a founder? Yes and no.

There shouldn’t be a stigma asking for or needing advice; the best writers need editors, the world’s top athletes all depend on an army of coaches & therapists — both mental and physical. No startup founder I know has ever claimed a straight path to success, and I believe founders and management teams benefit from the same type of expertise if they want to maximize their chances of success. Most will benefit from trusted advisors, the sounding board partners in the proverbial board room

This topic reminded me of a TED Talk from Atul Gawande, a surgeon who at the peak of his game decided to engage a performance coach, paying someone to observe him working in the operating room. While his surgeries were going remarkably well, he realized his skills in the OR had stopped improving, so as an experiment he brought a former professor in to observe a surgery and offer his thoughts. Gawande’s operation went perfectly. He felt flawless, but the professor showed him a full page of notes describing small things that Gawande should have done differently, little mistakes that he was completely oblivious of at the moment.

The Partner mindset, a time for counsel

When Loudcloud (later renamed to Opsware) raised its Series A, we specifically sought out Andy Rachleff of Benchmark for his expertise and earned insights from being an early backer of Equinix (NASDAQ:EQIX). Rachleff subsequently led the $68 million Series A and joined Loudcloud’s Board. By bringing Rachleff on as our partner, he brought experience from navigating hypergrowth combined with investing in high dollar infrastructure that gave our nascent team credibility to attract outsized capital. His foresight enabled us to hire and plan ahead of our growth — perhaps too aggressively, but that’s another story.

At Vertex Ventures we like to get involved early, helping founders with the fundamentals and guiding them on what they need to do: Make the next 20 critical hires. Tweak your go-to-market strategy. Refine the product. Match-make key customer and partner introductions. We’ve been in the shoes of startup founders, and we use the company-building skills we’ve learned in the trenches to help founders and executives find their footing as they build, refine, and rebuild their businesses. A company with its first 50 to 100 employees is where a terrific Partner really matters. Our guidance isn’t a one-time event, it’s a constant force multiplier for the founders and reflects ​​our take on trends happening in the industry.

At this point, we, as early-stage investors and operators, get a Sunday night call again: The CEO is dealing with two executives fighting. Revenue isn’t as easy to generate as they thought it would be. A key customer is threatening to churn. The company is running into barriers, and they want to brainstorm. The Partner comes back into focus. We see it again and again, usually around the time a company hits the 200-employee mark, and again around 800 employees.

The Investor mindset, an undeniable lure of fast money

Of course, you can’t really blame startup founders for wanting fast money. I’m the biggest fan of sharing a vision and working closely with management teams to make that vision a reality, but who doesn’t like a war chest? Money fuels brand, extends time to experiment, and creates a perception of stability and reduced risk for job candidates.

Taking hundreds of employees to thousands and beyond requires cash, but it doesn’t require the same level of day-to-day guidance that is needed early on. It’s at this point where fast money can be crucial. You can invest responsibly up until this point, but once your business is growing you want to grow as fast as possible. I was at Facebook in 2009 when DST invested $200M at a $10B valuation. Initial sentiment was negative; Why did the company raise a down round? (Microsoft had previously invested at $15B in 2007)? Zuckerberg’s logic was sound: He had quickly increased cash on the balance sheet which provided the business the cushion it needed to operate, take risks and invest in product development.

Even when founders have had past success, it’s impossible to know everything. Startups are prototypes. The team, market, and world are constantly evolving. Having a trusted partner in the passenger seat helps navigate countless hidden dangers. The best founders in my mind are the ones that are self-aware enough to know they don’t know everything, but they do know how to leverage coaches. As a former founder myself, I know winning requires more than betting on oneself; it’s crucial to collect diverse input from your team, get outside perspective, and build a tapestry of data upon which to grow.

The meaning of a true partner

For almost every startup, there’s an ebb and flow between the values that Partners and Investors bring as the business matures and its requirements change. Unfortunately, what we often see is founders gravitating toward that no-strings-attached-fast money, regardless of where the business stands. Why wait for a Partner when you can have the fast money — or a better offer — today, for the same dilution? After all, investors are all the same when you get down to it, right?

It’s the first time we’ve seen this pace of deal-making at such young companies, but some have understood the value of both. The fundamental takeaway is that it’s important to hire your investors and put them to work just as you would your own team, getting their commitment of time and energy, not just capital. When you have smart people around you — just like Gawande in the operating room — everyone benefits.

Special thanks to Edith Harbaugh (Founder & CEO, LaunchDarkly) and Sam Lambert (CEO, PlanetScale) for their input on this topic.