Being “founder-friendly”, or not, has become an increasingly relevant part of a venture capital company’s armoury in an increasingly competitive investment landscape. But what does being “founder-friendly” even mean, and has the phrase in reality become somewhat of an irrelevant marketing buzzword?
In episode 13 of Disrupt Africa’s “The month in VC” podcast series, released in partnership with Hlayisani Capital, Atlantica Ventures, and Goodwell Investments, we caught up with leading Africa-focused investors to discuss the art of being “founder friendly”, and whether it’s a real thing, or just a marketing ploy.
Once upon a time, describing yourself as “founder-friendly” made you stand out from the crowd, but now most VC firms do it. Trouble is, there is no “one size fits all” definition of the phrase, and the very phrase itself assumes that you can contrast it with “founder-unfriendliness”. The investors we spoke to agreed that, in all reality, the term has become quite meaningless.
Brett Commaille, founder and managing partner of South Africa-based VC firm Hlayisani Capital, says the term “founder friendly” is a marketing tool that gets wielded in many ways to fit many agendas.
“Investors are always looking for a way to separate themselves from the rest, and so “founder-friendly” has become one of the more frequently used terms,” he said.
But when it comes to it, is there any definition of “founder friendly”? Not really, and two people will use it very differently.
“The meaning behind it was supposed to be that we actually let entrepreneurs get on with the job, and we get out of the way,” Commaille said.
“But as an investor there’s a whole bunch of things that we need to bring to the business, and that is really dependent on where the business is, and the experience of the founder and the team. So our involvement will vary dramatically depending on what that business needs.”
Here’s Goodwell Investments’ Wim van der Beek’s attempt at defining it.
“I think what is really important about understanding the way that a business grows, and the role of a capital provider and a support system around the growth of a business, is that it is really important to understand the growing pains of the business, and to be able to contribute to that, and support a founder in going through those growing pains,” he said. “So from that point of view I think the friendliness that a founder can experience is in somebody who understands their problems and can help them solve them.”
Different definitions, then, and a lack of clarity on what exactly “founder-friendly” means can cause problems.
“The term is sometimes a bit problematic because it is confused with investors not doing their job correctly, and not doing proper due diligence, or not being very specific and clear about the terms of the engagement,” van der Beek said.
“Investors have a role to play, founders have a role to play, and there shouldn’t be any role confusion, so sometimes that is what I see happening with the use of the term “founder-friendly”. I’m hesitant about the concept and I think it’s overrated.”
Commaille says “founder friendly” can often be used as a cover.
“I think it can be used as a cover for an investor who’s just lazy or under-resourced, and doesn’t have the ability to add value or get involved,” he said.
Governance is key, says van der Beek.
“We are actually pretty strict about governance, and those who understand that and who are on that journey with us, and who see the benefit of having good governance in place, are actually the ones who in the longer term will describe us as being very “founder-friendly”,” he said.
“Conversations around governance typically tend to be very good indicators of how “investor-friendly” a founder would be and how “founder-friendly” we can be.”
It is very important for entrepreneurs to build a really good capital stack and understand who they have in their cap table.
“If you have too many people wanting to be too involved, especially people who are not that informed, that can actually be quite dangerous,” van der Beek said.
“For investors who actually don’t understand too closely what’s going on in the business, I think it’s really very healthy for them to just let the entrepreneurs get on with it. But for those founders that are looking for support from their investors as much as they are looking for the capital, I think it is really important for those investors to really understand what it is that founders need, and from that point of view I think “founder-friendliness” is really important.”
Getting the right balance is indeed key, but VCs will always have a serious level of responsibility.
“Input can come in many ways. You can have advisors that you can call on any time, versus people who sit on the actual board and have a different level of obligation to that company, and the obligation to ask you more questions and be more active in the participation in the company,” said Commaille.
“The core requirement in all of this is transparency – the investor and the CEO or founder have to have an open honest conversation upfront and go, “what do you expect?” and “what do you need?”, setting up a clear relationship that says “this is how we’re going to do it”. Some of that is contracted in the funding agreement, and the rest is a social contract between the two.”
