The Investor Scorecard is a simple framework for picking the right VCs and maximizing fundraising value
Who should be on your cap table?
We’re just around the corner from fall fundraising season, and many companies — especially climate tech ones — will be out to raise their next rounds.
This includes a few Toba portfolio companies who will be riding high off of the recent passage of the IRA.
If you’re raising from a position of strength as some of them will be, you have a great opportunity to put together the best possible fundraise and cap table — or investor Dream Team — to maximize value for your team, your existing investors and yourself.
Even if you’re not raising from a position of strength, you should still treat every equity sale as preparation for future sales and eventual liquidity by making sure the buyers, aka your investors, are the right ones from more than simply a “they have cash and I need cash” perspective.
But what makes someone the right or best investor? This post briefly outlines a framework for how to think about investor value.
There are 5 categories of value that an investor brings to your company
They are:
Knowledge Value
Signal Value
Network Value
Financing Value
Commitment Value
Let’s go through each of these briefly.
1. Knowledge value
Knowledge value comes from having operated companies, not just as an investor advising a portfolio, but as a builder in the trenches who hired and fired, wrote specs, executed against limited budgets, and achieved or failed to achieve operational goals (note: failures are a goldmine for learning).
There is nothing wrong with brilliant thinkers who have been professional investors their entire careers, as this ‘forest from the trees’ perspective lends itself well to pattern recognition and lots of helpful war stories from other companies.
But the empathy and precious common sense that comes from firsthand experience is unmatched. If you’re looking to be a better leader in your field, look for a knowledge partner who can flex between being a sounding board and a guiding light.
Examples
Trust Ventures specializes in breaking down regulatory and public policy barriers, with a partnership that has a deep legal background working in law, White House politics, and heavily regulated industries like housing.
Investor Matt Eggers from BEV spent years as an operator in commercial solar, having been a VP at Tesla, and spending time leading operations at SunRun during a time when that company more than 10Xed.
Sierra Peterson at Voyager spent years in climate infrastructure lending, after serving as a Fellow at White House Office of Energy and Climate Change, bringing policy and financial markets knowledge to the mix.
2. Signal value
Signal Value comes from the power of an investor’s brand, and it is often the most obvious value an investor brings to the table.
But be careful here. Signal Value can influence both Network Value and Financing Value, as positive perception both creates more relationship opportunities and de-risks future financing, but it shouldn’t be the only reason you enter into a marriage-long relationship.
I often see founders become infatuated with Signal Value, which is understandable. It is hard to resist a sudden wooing from a Sequoia, a GV or an A16z, as these firms are not only great shops with incredible track records (which casts a positive halo on subsequent investments), but also because they invest heavily in brand marketing themselves. That is, they work hard at non-investment activities in order to continue to increase their Signal Value, and this may or may not be something you want your investor to be focused on.
That said, the reason they do it is because it works. The power of the Sequoia name is its ability to single-handedly open doors, not just to other VCs but also to debt providers, customers, and talent.
3. Network Value
Network Value is related to Signal Value, but more specifically refers to an investor’s relationships and the introductions they can make for you.
When thinking about Network Value, it’s important to ask not only, “Does this investor know the who’s who?” but also to evaluate whether they have inroads into differentiated networks that expand your current network access in ways that are strategic to your company’s future.
Much of Network Value is often related to an investor’s previous operator experience. If they previously worked in high-growth SaaS, do those relationships offer unique benefits to your company? If they previously worked at Stripe, can they bring in the power of the Stripe Mafia to help with hiring or even fundraising? If their LPs are big commercial real estate developers, can they make customer introductions for you?
Examples
Fifth Wall is one of the best known prop tech investors, and their new large climate tech fund benefits from LP relationships with entities across the spectrum of construction / real estate / built environment.
The Westly Group has a host of LPs who are utilities, among other energy institutions, which offers a lot of strategic network value to its portfolio companies in energy, mobility and buildings.
4. Financing Value
Financing Value is an investor’s ability to fund you ‘all the way up’ or at least to help de-risk your next round or couple of rounds.
While there are many great preseed and seed investors coming onto the market, especially in climate tech, many of these are so-called microfunds of $20M or less, with constraints around follow-on participation, check size, and valuation. Although I believe this is generally a great way to run a venture business (a topic for another post!), this can be somewhat limiting for companies that are looking at a capital-intensive road ahead.
This can be mitigated by Network Value though — if an investor has a limited amount of cash-capital they can put to work, but a vast amount of social capital they can unleash on your behalf, then you just need to sure that they’ll be willing to do so when the time comes.
Example
Toba is a multi stage fund backed by a single family office that also invests as an LP in a multitude of other VC funds, from preseed to growth stage. This ‘crossover’ status means that there’s no strict cutoff for when our team stops investing (ie, “only seed” or “only below $XXm valuation”), and that we can share deals both up and downstream to help piece together a secure financing roadmap.
I can think of many preseed and seed funds that cut smaller checks but are incredible fundraisers on behalf of their portfolio companies: Tommy Leep at Jetstream, Paul Straub at Wireframe, Ariana Thacker at Conscience VC and Ian Rountree at Cantos are a few that stand out.
5. Commitment Value
Last but not least, Commitment Value might be the most important of all. You want an investor who is dying to be a part of your company’s story, and who will go to bat for you — whether that’s with customers, other investors, their own team, or a prospective hire.
Strength of commitment is more important than anything else an investor can bring to the table.
How do you measure this? Commitment Value will shine through in everything. When and how fast do they respond to you? How detailed and thoughtful are those responses? Do they feel more aligned to their team, or do you get the distinct sense that they’re sitting on your side of the table?
Commitment Value is the most subjective and the most subtle, but it underscores everything else as the basis for a long-term relationship that will inevitably see its share of ups and downs. At the end of the day, when someone really loves you, you just know.
Now that you have a sense of the 5 types of Investor Value, how should you incorporate these into your fundraising process? By building an Investor Scorecard.
Build your Investor Scorecard
Back when I was an operator, we would often confront a long backlog of exciting ideas for product and growth. With so many competing opportunities and so few resources to implement them, the right approach was to run a simple prioritization exercise (for example, using the ICE framework), design experiments for the top scorers, evaluate the results, and then implement the winners in a wider rollout.
You can apply a similar approach to fundraising, where prioritization is key not only to conserve your time to devote to the best prospects, but also because the Number One Law of Fundraising is to preserve scarcity, avoid looking stale and not shop your deal around to everyone. So, you have to be very selective about your Tier 1 outreach candidates, which (hopefully!) won’t be the same as your founder friend’s Tier 1s, and also be able to articulate why, since many investors will ask you who you’re talking to and who you want on board.
This all starts with your basic scoring system. Here’s what that might look like when you take into account your 5 categories of investor value:
Note: I learned long ago from Brian Balfour that a 5-point scoring system is not as good as a 4-point system, which forces you to pick a side — you are either a 2, which is trending negative, or a 3, which is trending positive. No wishy-washy “3” scores that don’t give you actionable information or force a decision.
Once your scorecard is built, and once you input your investor prospects, you can make a clearer and less emotional decision about how to prioritize your outreach.
If someone is a low scorer for whatever reason, that is OK and doesn’t mean they aren’t otherwise a “Tier 1” VC. But it should inform your outreach order. Your Tier 1s come first, and so on from there.
As a side benefit, this can also help you determine what types of materials, how much total time, and who on your team (or among your customers) you expose to the fundraising process. Tier 1s get Tier 1 treatment, and you save your other important stakeholders a bunch of time and effort.
Conclusion: Spend ‘lavishly’ on what/who matters most, save ‘ruthlessly’ on what doesn’t
This is an axiom adapted from Ramit Sethi, an old friend, finance guru and great entrepreneur in his own right. Ramit is fond of advising people to “spend lavishly on what you love, cut ruthlessly on what you don’t care about.” As a personal finance rule of thumb, this approach enables you to achieve some of the benefits of frugality while still enjoying the things that make life feel good for you. Simple, but the precursor to making it all work is honest prioritization and deliberate, intentional choosing.
The same applies to putting together your fundraise. Fundraising often heavily influences outcomes, and yet happens very infrequently across the lifetime of your company when compared to other events that you deal with as a founder. When big money is coming in from the sidelines, as it will be for climate tech this fall, it’s your best opportunity to build the fundraise and company path you want. I hope you will take some time to do so with attention and intention.
If this was helpful, please leave a comment below or share with a founder friend! And always feel free to let me know what you think on Twitter at susanfsu.
Did you really learn that from Brian Balfour or was there a feistier peer you worked with who told you about their hiring scale?