How To Pick The Right Operator-Investors
Over the last few years, operators have become increasingly active in the venture investing space; whether it;s investing through fund-backed scout programs, writing small but extremely helpful checks, or running an investment syndicate, there are now more ways than ever to get into investing.
Overall, I think this is great for the ecosystem overall. Operators have always been curious about the investing side of things, and democratizing startup investing unlocks potential wealth creation opportunities. But other investors and funds seem split on operator-investors. Operator-investors have been writing larger checks over this time period; some are backstopped by funds, others have raised their own fund based on their track record. I’ve heard funds complain about companies with “too many” operators on their cap table; for some, the issue is that these large check angels can take up big chunks of a raise, leaving funds to fight even harder for ownership in deals they’re excited about.
Not all checks are created equal, and founders should set some clear criteria for operators you want on your cap table. Here are just a few of many priorities I recommend folks think about before hitting the fundraising trail:
Who To Pitch First, Operators or Funds? This can be a whole post on its own (I might write one tbh.) But the number 1 question I get from folks is figuring out who to pitch first: do you start with operators and then go to funds, or go to funds first and then go to operators? There are pros and cons for each strategy, but most companies nowadays follow the same playbook: get a ton of angel and operator-investors on board, then go to funds. Except then funds can say you need to raise more to meet investment requirements, or you can quickly see yourself get overcommitted and then have to turn down people.
This works but some companies have trouble. IMO, the best strategy is to treat operators and funds as two different audiences and pitch both in parallel. That way, you create urgency either way: either operator-investors are liking the idea and investing, or funds are interested and that’ll make it way easier to close operators. Finding operators and getting yes’s might be easier, but the bulk of the deal is gonna be led by a fund, so finding them as early and as fast as possible should be the goal.
The Magic Number: There’s definitely such a thing as too many investors and there’s definitely such a thing as too many operator-investors. Figuring out the right number of operators to have on your cap table is the founder’s prerogative, but carving out a portion of the raise for those folks makes the most sense. A good rule of thumb is to max out at around 20% of the raise. Another way to mitigate everyone cutting you a $2,500 check is to have a relatively high minimum—we’ve seen check size minimums of around $10k, $25k, and $50k, depending on the round size. By dedicating a portion of the raise for operators and setting high minimums, you’re ensuring that everyone that backs your company is fully invested in a meaningful way, and you’re not just crowding your cap table unnecessarily.
Reputation Check: Why are you going to have operators on your cap table? Many times, its because of the reputational lift—ideally operators on your cap table are industry luminaries with a deep Rolodex to intro you to and help you close potential candidates. Which is why its critical you do a deep reputation check on operators on your cap table—don’t just talk to their portfolio companies, but folks at companies they’ve worked at all and team members. These folks are more integrated into the ecosystem and your reputations are deeply tied—you’re going to use their clout to try and secure other investors, but if your company turns out huge, they’re going to do the same. In hot rounds or with big companies, every investor tries to talk about how early they were on the deal. You don’t want the wrong person bragging about getting into your company early.
Shore Up Your Weak Spots: One of the most important skills to have as a founder/CEO is self-awareness. Knowing what you’re deeply skilled at—the top 1% in the world—and figuring out what to delegate or pass on to other folks is something every leader needs to know well. It’s also important to have the same awareness when putting together your cap table. You want operator-investors that have advantages, relationships, and skills that you don’t currently possess. If you’re a great engineer but building a payments infrastructure for micromerchants like coffee shops and beauty salons, getting operators with experience selling to small physical merchants (folks from Lightspeed or Block/Square fit the bill.) Operator-investors can provide tactical advice on how to solve domain-specific problems, which helps you show investors that you can recognize your gaps and solve them.
Similarly, operator-investors typically have deep networks: don’t be shy to ask. Usually they like talking about it, investors know this is a value-add too. If you want to raise from a big fund like Sequoia down the line, getting an operator on your cap table that also scouts for Sequoia could help make that a reality (though, you want to be careful about how much information gets passed along to the fund someone scouts for.)