The first founder-investor meeting is a two-way street

Rupert Wingate-Saul, Investment Director at AXM Venture Capital dives into how to handle those first investment meetings with founders. What are you trying to find out? Is this an interview or a conversation?

AXM Venture Capital manages the North West Fund for Digital and Creative. Over the past five years they have invested £17 million into over 40 media and technology companies across the region. Rupert leads the on-going management of the portfolio and have been a Board Observer for over 20 companies including fintech (PBF Solutions – exited to Raisin GmbH), ticketing (Fatsoma), big data (Metafused), video gaming (Nomad Games and Playdemic exited to Warner Bros) and predictive analytics (Formisimo/Nudgr).

You’ve been known to say the first meeting between a founder and an investor should be a two-way street. What do you mean by that?

It’s a chance for the investor to weigh-up the management team and ask themselves: is this a business I want to invest in? Yet, it’s easy to underestimate the extent to which the management team is also evaluating the investor. They’re about to embark on a journey with this investor, working together for anything from three up to ten years, maybe more.


I remember a conversation I had with a founder I’d invested in eighteen months before. The founder said in the first meeting, he’d noticed I was on my phone. He didn’t feel he was getting my full attention. I was in the middle of trying to close a deal, so for me, the meeting with him was a lower priority. But, from his perspective, it clearly wasn’t, this was a big meeting for him – proven by the fact it stuck with him for eighteen months.


My advice to founders who find themselves in a situation like this is to be honest. Either ask the investor if you can have the meeting another time, or if they can leave all other thoughts and considerations at the door, so they’re really focussed for that hour. If you come across as rude, it has a very material impact on your deal flow. Bear in mind that you’ll only be wanting to invest in between one and five percent of the businesses you talk to. For the businesses that you do want to invest in, you’ll be facing competition, so you don’t want to make it harder for yourself by seeming like you don’t care, you don’t understand the business or that it’s not a priority for you.


I hate Dragon’s Den because it assumes the investor has all the power – it’s so unrepresentative of what the relationship should be, particularly the way the investors behave on that show. If someone walked into a pitch and the investor acted like that, the entrepreneur would be quite within their rights to say I don’t want to partner with you. What isn’t reflected in programmes like that is this is only the start of a long relationship – you’ve got to be able to work with the person. If they’re acting like that in a first meeting, it’s unlikely that will change and you’ll face personality clashes further down the line.

For VCs, this is the second or third stage in the pipeline. They’ve received the pitch-deck and looked at it, and they’ve made a decision to take this first investment meeting. There is information as an investor you’re looking to get out of that meeting. What should you prioritise?

You’ll want to check the boxes and make sure you’ve got everything straight about the business. You’ll check out the management, the market, the stage of development, the traction, you’ll ask about the competition and maybe a little bit about the exit. But a lot of that you can get from the pitch-deck or follow up later if you have questions.


The crucial bit you need to take from the meeting is first, a view on the founders whilst they’re sat in front of you. Look to see if someone on the management team can really sell. One way of looking at the development of early-stage companies is that they’ll be constantly selling – whether that be to co-founders, customers, senior recruits or early hires. See whether they can articulate the vision, the value proposition, the paypoint etc.


By the time they come to you, you’ll be looking to see whether they can sell to investors, especially the later-stage investors who’ll be putting big checks into the business at the point they really want to accelerate. If they can’t articulate to you the vision or the proposition for the business, the chances are they won’t be able to do it with others, and that’s going to be a real blocker to them scaling the business. You can’t get that from the pitch-deck – you have to have them sitting in front of you to sense whether they’re passionate, knowledgeable and credible.


Secondly, you have to be comfortable that you know what the business does. Don’t be afraid of looking stupid. You have to be willing to repeatedly ask, especially if you feel unclear on a point or that they’re fluffing something. Carry on asking until you’re sure that you understand or that they don’t have a proper answer. A good test is to come out of the meeting and relay to someone the proposition, and what the business is. If they reply: ‘that’s like such and such’ – can you articulate the difference between them and the big player that’s been referenced? What is it about this company that makes it a potentially exciting investment?

There’s a risk the founder is so good at selling, you don’t step back and look rationally at the proposition. How do you avoid getting caught up in that enthusiasm?

You should definitely adopt a degree of healthy skepticism, try and break through the buzzwords. If you’re asking them what they do, and they’re spouting jargon, the correct response is: so, what do you actually do? If you’ve got this brilliant salesperson in front of you and you’re thinking ‘I’d buy that’, it’s obviously not as cut-and-dry as that, but bear in mind, they’ll probably have that effect on other people. They’re likely to be able to lead, inspire and build. It’s a positive asset.

There’s a risk when you’re asking founders all of these questions that it comes across like an interrogation. When you’re having first investment meetings, do they feel more like conversations or interviews?

Try and aim to have it be more of conversation, the thing that I avoid is it turning into a pitch. A pitch is a polished a best presentation of the company. It’s not the interesting part of the investment or helping you get under the skin of what the founder is like. You’re better shaping it more like a conversation, you’re pushing them to talk as much as possible and steering them towards the points you want to touch on.


You’re trying to pull out a number of things, meaning these conversations can be a little uncomfortable at times. You should challenge the founders because you want to see how they’ll react under pressure. I’ve had some founders come to me after a sales meaning and accuse the other of not understanding, or being stupid. The problem is with the company not articulating it properly, they should adapt to be able to explain their vision to anyone.


You want to be able to understand the extent to which the founder will be open to challenge and debate. When you push back or suggest something different, do they close off and go down their own route?


When you’re just having a conversation, founders will give a lot of information away without meaning to. When something interesting comes up, push on it and you’ll find out a lot more about the business.

How has your approach to these meetings changed over the years?

I’m far more likely to drill down on the same points until I get an answer I’m happy with. It is awkward and uncomfortable at times, especially if you’re asking the same question over and over again, but you gain some really important insight into the business and founder at that point. Like with anything, it gets easier over time, and you become increasingly comfortable with sitting the founder down, getting them a coffee and starting the conversation. The opening question I always use is just asking them to tell me a bit about their background. This tends to be an easy and natural way to get the conversation flowing and means the founder doesn’t just launch into trying to pitch their product. You can start steering their conversation from the things they are saying onto the things you want to discuss.


The more experience you have the more points of reference you have – which may not be directly useful to the founder but can lead to more productive, in-depth conversations as well as giving you more credibility as an investor. Although you may not thoroughly understand the business, it can help that you know the adjacent markets and are familiar with the problems they might face. You gain more insight working with a portfolio post-investment. If you aren’t confident you understand the market well enough, ring someone up who does and take ten minutes of their time – ask them what they would ask the founders. This allows you to ask the founders questions from a relatively knowledgeable standpoint rather than just making things up. You can also introduce them to each other, the contact is a chip you’re throwing in as you try and prove credibility and sell yourself to the business

What are the things that get a founder to the first meeting from the pitch deck?

The reality of early-stage investing is that you are not going to get the perfect team with big company experience, where the CEO/CTO has done three start-ups and the sales officer has scaled another business. If they’ve already got that team, they’ve probably raised a million from someone who’s invested in them in the past and you’re unlikely to get a look in on that deal as an early-stage investor.  It will be the bare bones of a team and a huge part of the challenge and reason for bringing the money in isn’t just because the need to ramp up the sales otherwise they’ll see a dip in cash flow and they’ll need the funding, it’s because they probably want to scale the senior team over and above the current stage of the business.


Do they understand this requirement to bring in other senior hires and expertise and do they understand how to make those connections, given that they won’t be able to pay market rates? You’re having to bring them in on below market rate salaries, a chunk of equity and a large portion of excitement around the business. Very few founders come in with a well thought-through strategy of how they’re going to attract three or four senior hires. It’s not usually a worry for me unless I see a two-person team who say “we’ve got it sorted, we’re just going to be this team all the way through” and you’re thinking, that’s not going to happen. At the point you can clearly see warning signs that actually, they just don’t want outside influence or expertise, that’s a big red flag and you will probably feel that you should just walk away from the investment.

I don’t think there’s a checklist of non-negotiables when you’re analysing a pitch deck, you’re looking for something that is particularly interesting, such as a member of co-founding team with interesting previous experience, or a compelling proposition which has encapsulated an issue in the market. It may just be the case they already have an investor with a good track record.

You take the meeting just to see what was it that this person saw in the business to make them want to spend time and money on it. Rather than having a checklist, I ask myself what stood out in the pitch deck and what I want to know more about.

When everything seems rosy on the surface, what are the points you should double-check and what are common unforeseen problems?

The bit to really get your head around is what is the actual traction or stage of development of the business. Every business will put forward a sales pipeline, and they’ll normally show that they’ll be selling a couple of hundred pounds a month but they’re just about to land these huge customers, who are worth five, maybe twenty thousand a month to them. Understanding where they are in that process is hugely important. One of the advantages you’ll have is that you’ll usually work with that business for a couple of months through the due diligence process. It’s always something to keep in your mind: what the sales pipeline looked liked when you sat down with the company, and what it looks like now. I bet for a large number of companies that sales pipeline stayed exactly the same. What that usually tells you is that the company is at a lot earlier stage than they are presenting themselves; they don’t understand their sales cycle enough that they can close business repeatedly. Until they can get some of those aspects fixed, they’re not going to scale and putting money into the business might not fix some of those fundamental issues.

Is there anything in the attitude of a founder that would make you instantly decide not to invest?

Firstly, founders who are unwilling to take on external perspectives, challenge or advice. Virtually all of these companies say they’re going to multiply their revenue ten or twenty times – and that is unbelievably hard to do. There are a lot of pitfalls along the way and it’s unrealistic to expect a founder to navigate those pitfalls without outside help. If they go on without help, they will fall into some of these traps – and whilst it may not be terminal for the company, it will definitely slow the growth rate down, damaging the prospects of the company and its overall value.

How would you measure passion and if it's substantial enough to be effective?

Ultimately what you measure a founder on is their achievement. You end up in a lot of debates with founders, teams, and management around the effort they’re putting in, unfortunately, in the grand scheme of things, that’s irrelevant. Passion doesn’t correlate to output achievement, you’re trying to grade your founding team more on execution. However, this is a market they’re going to be in for ten years, fifteen if they’re going to take the business to a substantial exit. There’s got to be both an interest in the sector and a real desire to drive that business forward and make a success of it.