Freshwater Investor

As she told the story of the preceding few weeks, a time when several different venture capital funds were vying for a spot, pestering her with phone calls, lunch offers and even the occasional gift, it struck me. My friend had, after four years of struggling to get her business off of the ground, become the belle of the ball.

“Finding the right investor is a lot like the dating process,” said Dhana Goldstein at February’s Pipeline Fellowship Conference, a meeting of seasoned and aspiring angel investors at the law offices of Goodwin Procter in Midtown, Manhattan. Is every date going to yield a long-term love affair? “You like them and they like you back. You think they’re cute, and so you go out a few times and get to know them. But… getting married is a commitment.”

Alexa von Tobel, whose personal finance site LearnVest has raised over $24 million in funding since its launch in 2007, most recently $19 million led by Accel Partners in July of 2011, is well-versed in the ritual of seeking and securing funding. “At many phases we’ve been in a position where we have a lot of opportunity,” von Tobel says, in reference to the multiple venture capital firms offering investment in LearnVest’s Series A and Series B rounds. “But early on I received the very good advice to be very, very thoughtful about my decision on who to partner with, because taking an investment was going to be a multi-year, maybe even decade-long arrangement.”

It’s easy to get caught up in the hype and energy of so much opportunity, she says, but by viewing her relationship with potential investors through the lens of a long-term relationship, even a marriage, helped her to stay focused on the future, rather than the fleeting excitement of signing a multi-million dollar contract.

“The action stage of investing is the wedding,” says Robert Delman, managing director at Golden Seeds, an angel fund that focuses its investments on women-led ventures. “The marriage, of course, is much, much more important.” And so, he says, the decision-making is just as tricky for investors as it is for the entrepreneur who stands to benefit.

If the road to financial backing is a thrilling and emotional one for entrepreneurs, for investors, especially Angel investors, who regularly part with their own money, rather than an impersonal fund, it can also be especially fraught. Parting with money is undeniably personal. What if the decision is made too quickly? When do you know to follow your gut?

“Intuition only gets you so far,” said Delman, continuing the romance theme. “I like to spend a lot of time with the entrepreneurs I’m considering funding, testing them and challenging them.” For him, it’s about asking the right questions—of the start-ups team members as well as friends and colleagues to gauge the entrepreneur’s promise, humility and coachability. “Like any relationship,” he says, “It’s best to really get to know each other before you go to bed. Because once the papers are signed you’re going to live together for the next five to seven years.”

Think of investors doing due-diligence as the most thorough stalking job you could imagine, one prospective angel investor joked to me. Their job is to look into your business plan, projected numbers and history of success through dozens of phone calls and meetings with former employers, advisers, bankers and even rivals in an attempt to evaluate the likelihood of your success—and potential returns to the investor. Once she’s satisfied, like any high net worth relationship, there’s one final step before walking down the aisle: the pre-nuptial agreement.

Well, not really. But almost. “I wouldn’t say the term sheet is exactly a pre-nup,” says Delman, “But in terms of structuring the deal it’s pretty close.” A term sheet is meant to lay out, in no uncertain terms, each party’s ownership in the company, and road-maps milestones and possible succession plans for further down the road. In short, it’s a very complicated—and legally binding—contingency plan for both parties that consummates your long-term relationship… for better or for worse.

For von Tobel, her experience since taking her first outside dollar in 2009 has been positive, something she credits to her relationship-minded approach to finding the right investors. “It’s really important to think not just about who you can stand to be in a long-term relationship with, but who you’ll be excited by years down the road,” she says. “Because of that, because of my thoroughness through all that excitement, we picked the right team, and I can say with all honesty that I have true and genuine trust in my board and my investors.”

From my vantage point, there continues to be confusion about the definition of private equity and venture capital, the distinction between the two, and whether Romney’s track record makes him a hero or villain. With the economy the No. 1 issue of this election, let’s look at Romney’s role as an investor to see how he might turn the country around.

Venture capital is all about a vision for what the world might be like in the future and helping entrepreneurs build businesses to get there. A venture capitalist doesn’t run the business; instead, the VC creates an environment for an entrepreneur to succeed, by providing guidance, capital and insight, while removing obstacles. Venture investors buy a minority ownership position in a company, and influence the outcome of the business through their role on a company’s board of directors.

The Kauffman Foundation released a study showing that two-thirds of net new jobs created are by young businesses — those less than five years old. According to the National Venture Capital Association, venture-backed companies account for 14 percent of all private sector employment and 21 percent of the U.S. gross domestic product. Staples, Domino’s Pizza and Sports Authority are examples of companies Romney helped start during the early days of Bain Capital, when Bain was doing classic venture capital start-up investing. This venture capital experience suggests that he has the background to put in place policies and create an environment in which new business formation will blossom.

As a result of Bain’s early success in its venture investments, it raised more money from investors, seeking strong financial returns, and Bain Capital became a premier private equity firm. Private equity is different than venture capital, as PE firms buy an entire company (often troubled or underperforming companies), using a combination of equity and debt. As owners of the business, they have the ability to pick the chief executive and set the strategy for the company. PE investors make money by growing the business, and making it more profitable. They do this by adjusting three fundamental levers: price (how much you charge for your product — although the competitive market often has a strong say here), volume (how many products you sell) and cost (what it costs you to make each product). Choosing which lever to pull, and pulling it, isn’t always obvious or easy, but businesses today compete in global markets, and have to make tough decisions, quickly.

Private equity is capitalism personified. Winners succeed and losers fail, much as in life itself. To succeed in PE investing, your successful companies have to outweigh those that fail, and make no mistake, failure is a part of business in a competitive world. Bain Capital’s returns during Romney’s tenure were among the best in the industry. His formula worked.