Choosing the Right Investor

Greg Nemeth on Choosing the Right Investor
By Roger Chen (@rogerbchen)

I recently had the pleasure of hosting Greg Nemeth, an entrepreneur and pioneer in wearables technology for my podcast, Supreme Clientele. I wanted to share an excerpt from that conversation as I think the story is incredibly important to early stage startups currently fundraising:

This is an interesting thing that I noticed.
When we were in YCombinator, there were a lot of speakers that came in who talked about how detrimental adding VCs to your board could be. I think it was Mark Pincus, actually, who came in and was talking about how detrimental VC influence in some of his other companies were.
The whole argument was: VCs come in. They want you to go big or go home. Hit a home run. They're going to force you to make decisions that are really risky, and that might not be best for the company.
He had some bad experiences and, in his mind, that had ruined a few of his companies. He was really adamant in saying: Don't let any investors be hands on; the best thing you can get are hands off investors.
We heard that from a few different people. After having reflected on it, I think it can be true for later stage companies with more seasoned founders. Definitely when you're getting to a Series C stage and a VC pushes you to make risky decisions, I can see how that might be a problem. But for early stage companies I think you need as much investor help as possible, especially when you're a first time founder. We knew nothing. We knew absolutely nothing.
Instead of going out and benefiting from this great YC network, we tried to get investors that were going to be as hands off as possible. We actually turned down a few investors because they wanted to be more hands on. One of the biggest mistakes we made.
And there really was this sort of view in the Valley that the better company you were, the more desirable of an investment you were, the more control you could have over saying: We don't want you to have a board seat; we don't want you to be hands on.
So we almost wore it as a badge that we don't have hands on investors, we don't talk to our investors. They just gave us money and they trusted us. I think that sort of thinking is backward and really detrimental.
I hope it's changed or is changing, but I've heard both sides of the story from friends that are out there.

Update: Here are YCombinator's updated guidelines for fundraising.

1) You should care more about good investors than good valuations.  Use the YC investor database, talk to us, talk to alumni, and talk to the founders of the companies that investor has funded (especially in cases when the companies haven't worked out).  However, you should insist on clean terms (in practice, offering messy terms is a sign of being a bad investor).

2) You should aim to sell only about 20% of the company in your seed round (though 25% is ok if you're raising a 'large'--say more than $2.5 million--seed round).

3) You should raise enough money to get to your next significant milestone.

4) You should try to get the process over with reasonably quickly so you can get back to work.  The founders that fall in love with fundraising rarely go on to be the most successful.