By Aimee Raleigh, Principal at Atlas Venture, as part of the From The Trenches feature of LifeSciVC
In most companies I am fortunate to be a part of, there is a strong relationship between investors and operators. But every so often at a networking event I hear from an executive frustrated by an investor dynamic, or vice versa. It often seems as though an artificial chasm has been constructed between operators and venture capitalists – the discourse on social media certainly reinforces this us / they mentality. And no doubt there are at times justified reasons for this divide, hewn from experiences where the two phenotypes are in conflict and have differing objectives for a given company. But while it may be cathartic to complain about one or another as a group, this stereotypical treatment misses the nuance. To say all VCs are alike is akin to saying all CEOs, or all CSOs or CMOs, are the same – which we can all acknowledge is untrue.
Why do we so often revert to stereotypes of “other” when faced with opposing, and maybe at times uncomfortable, views? To opine on the topic as a whole would be to revisit the conflicts of most of human history, so for today I’ll keep it focused on the relationship between investors and operators. I’ll try to persuade you that the motivations for these groups are not so different after all, even if tactics vary.
One benefit of working at a firm that pursues both “traditional” venture investing (evaluating a company that already exists to decide whether or not to invest) as well as company creation (helping to build a company from day 1, and often long before that) is the benefit of serving in both roles – maintaining the decisive conviction of an early operator, while balancing the strategic imperative to create monetary returns for stakeholders. So often the goals of the early newco executive and the venture investor are tightly intertwined. To roll up one’s sleeves and operate makes one a better investor, and similarly to spend time as an investor often adds a valuable perspective to operating. In this post I will attempt to outline some of the less helpful biases or misconceptions about each group, and in doing so offer my tips for appreciating the other’s outlook. If you gain anything from this post, I hope it is a reminder to always assume the best in someone as a default, and give each other a little grace in difficult situations.
Considerations for investors when interacting with companies:
- Pitching a company is a deeply vulnerable activity. Often many years in relative solitude are required to develop a therapeutic hypothesis, conduct early work to de-risk it (whether on paper or in the lab), and assemble a stellar team to execute on the thesis. Regardless of the self-work an executive has put in to distance themselves from ego, it is impossible not to feel personally slighted when outsiders question that thesis, strategic plan, data, or some other aspect of the pitch. Be cautious when asking questions during a pitch meeting not to come across as aggressive or overly negative – your questioning will almost always be received with more intensity than was intended. Err on the side of being polite, and try to frame opinions as such rather than absolute truths.
- Remember that the stakes are higher for operators in early-stage ventures. Executives and early company employees are betting a lot on their endeavor – their current livelihoods (and future livelihoods, if successful), their career trajectory, their network. To an investor who has 10-15 irons in the fire, one company facing a hurdle may not feel like the end of the world, but to that company and its team it can feel existential.
- Your edge is pattern recognition – share it. Lean into your strengths as an investor who can see across dozens of companies at any given time. Investors have the immense benefit of witnessing successes and, more frequently, all the myriad things that can go off the rails over the course of a company’s history. Remember that operators, especially executives new in their roles, may not have encountered a given scenario before – they may benefit from the collective wisdom of a broader network. Be quick to volunteer learnings from similar scenarios or offer to put the team in contact with potential advisors (especially those who have been in their shoes before). And, most importantly, show support and offer to brainstorm as opposed to criticizing, especially if the circumstances that led to the hiccup are largely out of a team’s control.
- Try to be conscientious when asking the team for more work. I frequently observe in board rooms what I call the “one does not simply walk into Mordor” disconnect – investors, often trying to be helpful, sometimes suggest alternatives (“why can’t you just do X, Y, Z”?) that aren’t realistic for one reason or another. Suggestions can come across as superficial and callous when they are untethered from the practicalities of discovering and developing drugs (e.g., don’t account for long lead-time dependencies, ignore the lack of team expertise such a change would require). My advice is two-fold: if you are an early-career investor who has not operated, seek to build that experience into your current or future role – ideally with one company over a longer period, but alternatively in more dedicated month- or quarter-long engagements where you can help a company out with a defined objective. Additionally, consider the burden of the “ask” and limit the number of suggestions to those most impactful, as each one will require time and resources to chase down.
- Actions speak louder than words. Related to the above, rolling up your sleeves and doing the work before making a suggestion can go a long way towards building trust. Do you have a strong opinion on a preferred second indication for a program? Spend a few days developing a primer, summarizing the landscape, the unique product profile for the mechanism and program, and outlining what it would take to get to a proof-of-concept inflection point. If anything, the team will have a useful resource to supplement their own thinking, and it will demonstrate your commitment beyond regular board meetings. Similarly, compiling key KOL notes in a given area, working up a competitive intelligence document, summarizing key presentations or posters from a relevant conference, or introducing the team to prospective future employees or advisory board members can go a long way.
- Avoid oscillating between apathy and activism. It’s easy to be less engaged with a company that is doing well – they have it under control, so why get in their way? Selective focus is often required when other portfolio companies facing challenges demand more of one’s time. But I find it unproductive when investors rapidly shift between limited and full engagement (but without deep background) when something goes wrong. We see it all the time: a company is doing well until they hit a snag, which necessitates taking a few steps back in the plan and revisiting assumptions. Some investors become more “activist” at this point, going beyond productively thinking through next steps and instead switching to micromanagement, scrutinizing every line of the budget with a doom and gloom attitude. As another example, I see teams go to Herculean efforts to pitch their companies and secure the first term sheet, only to have an investor complain about some minor aspect of those terms[1]. In these instances as an investor, it’s useful to acknowledge the effort that went in to getting from point A to point B, and prioritize feedback to those most important for optimization vs. those that won’t matter much in long run.
- Build trust with teams, which includes giving feedback early and often. Sometimes people build feedback up to be a huge undertaking, only delivered once a year by a single person (often the board chair) and requiring an immense amount of prep. But feedback is helpful on a much more frequent basis, and the more often it is delivered the easier it becomes to make it a habit. As teams are forming or a new operator is coming into a role, it’s useful to genuinely acknowledge triumphs and high performance, as well as to suggest alternatives in a constructive way when a different tack may have been taken. Sharing feedback on a 1:1 basis is an easy practice to start early and often makes for the most productive relationships.
Suggestions to operators for interacting with investors:
- Investors are almost never perversely incentivized – if the company succeeds, so do they. Sometimes the tenor of a conversation can quickly turn defensive when a team feels their strategy or storytelling is coming under fire (see earlier point on vulnerability). But even so, try to keep in mind that an investor is motivated to accomplish the same outcome as teams, which is to see a drug successfully developed. Whenever receiving questions or suggestions from investors, if the gut instinct is to defend, try to remember to take a beat and consider that they are (almost always) well-intentioned.
- There should never be any surprises revealed during a board meeting. If difficult topics are planned for the discussion, make sure you are previewing them ahead of time and ideally connecting with investors 1:1 before the formal board meeting. This advice seems obvious, but I can’t tell you how many times investors are shocked at what is included in a pre-read (or worse, not even included in the pre-read but rather as part of slides discussed live during an executive session). Remember that your investors and independent board directors aren’t in the weeds the same way you and your team are. Even subtle shifts that feel obvious to you may feel surprising to them when updates are shared only on a semi-regular basis. It’s useful, when a board deck is in near final draft form, to read through as an “outsider” with the last board deck as context – consider what has changed over the past quarter, and whether any particular change is worth explicitly calling out.
- Capital formation is a goldilocks endeavor. Financing your company is a major accomplishment, and often hard-won. Beyond the binary ability to finance, the art in raising money is often in knowing how much to raise, and the ability to do so at a valuation that is fair to existing stakeholders. Raise too little and you may come back asking for more money before there’s been true value creation; raise too much and you may have unduly diluted existing shareholders, and / or risk being distracted by activities that are not essential. Whenever building out the long-range plan, consider carefully the dilution of all stakeholders (team, founders, other common holders, and investors who came in at different stages) – while not the #1 imperative to solve for in a financing, being thoughtful about the raise and valuation often goes a long way.
- Like in politics, flip-flopping may gain near-term traction but rarely builds trust over the long-term. In 1:1 meetings with investors, it’s easy to assure them that you are aligned with their suggestions and that your team will work towards implementation. But it’s obvious over the course of 6-12 months when an executive consistently agrees with an investor privately only to steer the company in a different direction. Careers are long – the goal isn’t to keep investors happy all the time, but to make dozens of choices every day to continuously steer the company in the right direction. Sometimes this means acknowledging the difference in opinion and walking an investor through rationale as to why the team is taking a different approach.
- Asking for help is not a sign of weakness, but rather a sign of maturity. Any good investor will relish helping directly or offering to source help within the network, and that’s a huge component of the VC job description. No one expects an operator to have faced every challenge before and have everything figured out. When a crisis hits, try to avoid the instinct to hunker down and close off information flow – instead take advantage of the network you have built, which includes investors and their connections.
- Investors can spot dysfunction even when not in the weeds. Even if you prefer to keep investors at arm’s length, don’t be surprised when they pick up on a troubled organization. Remember that investors often interact with hundreds of companies a year, and a dozen or so on a very in-depth basis. Just like investors can pattern match when it comes to recognizing a sound thesis, so too can they discern the signs of an unhealthy organization. It’s always better to be upfront about dysfunction before it is fully penetrant, both in terms of ability to right the ship and in building trust with those around the table.
- Don’t be afraid of providing feedback to investors, both positive and constructive. Investors want to be helpful – if they are doing something that isn’t productive, be tactical but quick in feedback on how their approach may be modified in the future for the benefit of both parties.
What we do as an industry is incredibly hard – it takes more than a village to bring a therapeutic from an idea to potential commercialization, and we fail much more frequently than we succeed. Some of that hardship is embedded in taking bets on unproven biology or in commercially nascent spaces, but a fair amount is caused by friction amongst stakeholders. Investors and operators are often depicted as polar opposites, but in reality have much more in common when aligned on the same company and goal. What if we all strived to remove a piece of the hardship that’s wrapped up in unhelpful narratives pitting one group against the other? None of what I propose is complicated, but all of it can be hard in the moment. So when the next difficult conversation comes, extend a little grace. We’re all walking (more often trudging) the same road, and it’s a long one.
[1] Though to be clear, valuation is not “minor” – see below point on capital formation.
