This post originally appeared on our Condensing the Cloud Substack, read it in full here.

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When a startup is struggling, or merely unproven, survival itself is at stake. In the early days at Guidewire*, my co-founders and I quickly realized that beggars can’t be choosers and that any capital meant keeping the dream alive. Trying to persuade investors was just another front of grueling effort against the tide.

Since the early 2000s era when Guidewire raised its pre-IPO rounds, an enormous influx of capital into venture has afforded founders more options. These days, any startup with strong traction will attract multiple investors clamoring for engagement. For founders exasperated by the unending cycles of selling and recruiting, being courted by VCs can be a welcome reprieve – an opportunity to be flattered and sold to, for a change!

But in that flattery lurks the possibility of a grievous mistake: choosing the wrong investor.

“Wrong” is a strong word. I choose it intentionally to describe a decision that undermines what the founder cares about most: for his or her young company to thrive, for it to compound in value and to succeed in its mission. The wrong investor can doom this quest almost as surely as a flawed strategy or team. So, to maximize what matters most, the founder must strive to see through the flattery and quiet the craving for personal validation.

The mistake can start with what seems like a rational plan: “Run a tight auction and take the highest bid from a name-brand firm.” The main point of having investors is to secure capital, so why not take the least dilutive dollars on offer?

This reasoning overlooks a criterion that matters incomparably more than investor brand, breadth of portfolio services, star power of the investing partner – or, yes, valuation.

What Matters is Deep Alignment

I call this critical factor “deep alignment”—a state of mutual confidence that, with regard to a startup’s identity, both founder and investor share (a) the same beliefs; and (b) a compatible reasoning process in the face of unknowns or adverse events.

That identity can be divided into six distinct categories:

1. Market diagnosis: a precise account of the end market — its personas, pains, requirements, behaviors, incumbents and segments — including a lucid thesis for why the opportunity exists at all.

2. Strategy: the plan of attack — rigorously informed by the market diagnosis — including a non-promotional definition of the core product and its boundaries; the business model, differentiation, distribution and the logical sequence of waypoints to be pursued.

3. Time horizon and capital plan: how long, in years, it will take to fulfill the strategy, with high resolution for the next twelve months and the hurdle for the next round of funding; and the depth and duration of the founders’ commitment to build the company.

 4. Operating principles: an expression of the “financial harness” in which the company will operate; the unit and company-level economics to be achieved over time; and the processes by which the team will define the plan and take corrective action if results fall short.

 5. Talent management: where the company will source talent; how to balance tenure and external achievement; the principles for compensation and performance management; and how the founders themselves expect to be evaluated.

6. Culture: all the important qualitative attributes that define the company. Among them: values and what the company is prepared to sacrifice to uphold them; how the team communicates and conduct meetings (including whether they start and end punctually!); how the company celebrates and spends on discretionary items; and the latitude people have to work remotely, flexibly, etc.

Here, it is important to distinguish between mere “alignment” and what I am calling “deep alignment.” You are “aligned” with investors if you use the same language and generalities when talking about your company. It’s an impressionistic — and ultimately vacuous — sense that everyone involved are “good guys.”

Deep alignment demands more. It only develops if you and your investor have discussed each of the identity topics in detail and emerged confident that you fundamentally agree and will be able to disagree constructively. Basic comprehension is the foundation of this confidence, so I urge founders to write down — in plain language — their market diagnosis, the premises of their strategy, and their company’s identity. Then the deep and vulnerable conversations can follow that engage the obstacles, downside scenarios and unknowns.

All of this can feel uncomfortable, since every founder instinctively wants to put on the bravest face rather than give voice to doubt or vulnerably share the setbacks. It can also feel taxing, as it takes precious time and effort to explore areas of possible dissent.

But this I promise: whatever energy is expended in this effort is trivial compared to the stakes.

Misalignment Kills

Let’s consider those stakes in two senses.

First, the terrible downside of misalignment. If business keeps going great, no problem! But when deep challenges inevitably arise, it can be a multi-year torment to work with investors who have divergent beliefs about the market, who target time horizons much longer or shorter than the founder or who hold sharply different expectations of the trade-offs between growth and profitability.

The friction here can go well beyond intellectual debate. Just consider the scope of a board’s power. It has approval authority over all management decisions that matter: the operating plan and budget, executive compensation, the recruitment of senior leaders, M&A, financing and just about any action that touches the cap table. An oppositional relationship with investors can render it impossible to execute these fundamental decisions.

And even if matters don’t escalate to full adversity, being in continual tension with your own “side” while trying to win in the market exacts a profound toll on the founders’ energy and motivation. Notably, big valuations awarded in advance of traction risk big disappointment, heightening the risk of this kind of dissonance.

Contemplating such downsides, some founders try to negotiate for greater corporate control: special share classes, reserved board seats and other provisions that can allow them to drive their will over potential dissent. Investors loathe these structures, but some high-flying companies can achieve them during boom times. My view is that such arrangements are about as helpful to a productive partnership as aggressive one-sided pre-nuptial agreements are for harmonious marriages.

Now, no sane investor gets involved with a company intending to go to battle with its management team, but also no one gets married intending to get divorced. And yet, it happens all too often! Why? For a thousand specific reasons but only one universal one: a failure to agree on the deep principles that define identity and partnership.

In the funding process I see founders too often fretting over funding details rather than testing these principles carefully and counterfactually. It’s a serious misallocation of effort.

The Upside for Getting It Right

Given such downsides, do I advocate that founders find the most pliable investors they can? Well, as a former founder I do believe investors should embrace the principle of “first, do no harm.” But a thoughtful founder should aspire to a much higher standard.

Deep alignment with your investors is far more than the avoidance of conflict. Indeed, along with strategic precision, it is one of the superpowers of a young, insurgent company. It enlists allies in the epic “us-against-the-world” struggle that is every startup’s habitus, empowering a young company to fight its battles with greater confidence. It unlocks the energies of veteran advisors to frame critical questions and to share broader vision. It is the critical antecedent of resilient trust when challenges inevitably arise. And it mitigates a fraction of the terrible loneliness and exhaustion of the company building journey.

To belabor the metaphor, deep alignment with investors is as consequential for the success of a young company as marital harmony is for personal happiness. It is neither necessary nor sufficient for success in itself, but it eliminates one terrible downside and boosts the upside almost as much as having the right founding team. As with any critical decision, making the right decision here requires starting with the right criteria.

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Helping small startups and larger, more-mature tech companies scale to reach their potential is always tricky. Fortunately, last year, we heard and shared a lot of great company-building advice from our colleagues and the brilliant professionals in our network.

Here are 12 great pieces of advice from the Battery team to consider as we enter 2024:

1. Early-stage, B2B companies should, in addition to other metrics, focus on logo velocity.

In our 2023 State of the OpenCloud report, we recommended that growth-stage software companies focus on logo velocity, rather than just boosting revenue:

“We know that as companies mature, they rely on expansion revenue to drive growth. However, logo velocity helps to ensure that there is a large enough customer base to fuel future growth, but also aligns sales to balance new ARR and expansion ARR from day one.”

The takeaway: Make sure your sales team is pushing to sign up new customers. Getting a foot in the door with multiple enterprises might be better than making yourself dependent on one or two big customers, even if they bring in significant revenue.

2. Above all, ensure that your product is best-in-class.

In his November 2023 op-ed, originally published in The Times, our London-based Partner Zak Ewen offered some specific advice on how U.K.-based technology companies can battle American competitors on British soil and thrive.

But one of Zak’s core tips for how U.K. companies can gain a competitive edge — to “work hard, and early, to refine and perfect their product” — applies to companies of all stages and geographies.

The takeaway: There is simply no replacement for high-quality product, which naturally attracts customers and sets you apart from the competition.

3. Startups should think carefully about the compensation culture they’re creating.

In his article “The Dangers of a High Compensation Culture” for The Information, Battery partner Marcus Ryu warned that benchmarking your compensation to more-established peers to compete with the best can be a losing game. Establishing a high-compensation culture can make it harder to achieve lasting enterprise value—and can stick you with a staff who are motivated mainly by money, and are not necessarily dedicated to the mission.

Marcus suggests, instead, that leaders: “foreground the three extraordinary things a startup has to offer: (1) equity value that can grow to many multiples of present value; (2) an opportunity for profound learning and rapid growth in the service of a world-changing mission; and (3) the immense professional reward of participating in the emergence of a new market leader.”

The takeaway: Thoughtfully consider compensation and how it motivates talent. Money matters, but other cultural factors may matter more in the long run.

4. Reassess your banking relationship(s) as often as you reassess other key partnerships.

In a webinar on treasury management after Silicon Valley Bank was placed into receivership and sold, Brian Kinion, CFO of MX*, advised startups to build redundant banking relationships with institutions of various sizes, maximize their sweep strategy between accounts and rethink banking partnerships regularly. Said Kinion: “Most business partnerships undergo a new RFP periodically to realign and ensure the relationship is still mutually beneficial.”

The takeaway: Evaluate your bank(s) annually. How high are the fees you’re paying? Are you getting the best rates? Could you gain more operating leverage? Is the bank technology keeping pace with your growth?

5. Great cybersecurity protects what’s most crucial.

In a webinar on cybersecurity readiness, Daniel Schwalbe, CISO of DomainTools*, said that a company’s cybersecurity strategy should focus particularly on what he calls its “crown jewels.” He defines these as any assets that, if compromised in a breach, could potentially shut your doors. Schwalbe’s advice: “Constantly assess gaps in your program, knowing your key points of exposure–especially your company’s ‘crown jewels.’”

The takeaway: When it comes to cybersecurity, know what matters most — and constantly reassess how well your key assets are protected.

6. Don’t just sell shovels.

Battery operating partner Bill Binch shared some advice a mentor once shared with him: “No one goes to Home Depot to buy a shovel. They go to Home Depot because they need a hole in the ground.” For startups, this means your sales pitch should focus on solving the customer’s problem, not your product’s specs. As Binch explains:

“Listen to your own team’s prospecting pitch. Is it talking about what your product does or what kind of outcome your product creates? If it’s product-specific or filled with jargon, then maybe it’s time to think more clearly about the holes your customers are trying to dig. Remember, your pitch should always answer three classic questions: Why buy? Why buy now? Why buy me?”

This advice echoes timely advice offered by Battery’s business development team Scott Goering and Evan Witte. In a November 2023 Substack post on the state of generative AI, they emphasized that enterprises are focused on AI’s potential to solve business problems, not the bells and whistles. As the BD team put it:  “AI startups should lead with the business problem their tool solves or the business opportunity it can unlock, not hype up the tech itself.”

The takeaway: Always focus on the customer’s problem—not your tech.

7. Enterprise marketing should be laser-focused on helping sales win deals.

On our “Sound Bites” podcast, Freshworks CMO Stacey Epstein shared that she judges the quality of marketing materials by one measure: “What does sales need to win deals? That’s the ultimate question that I think every marketer should keep with them.” She further noted you can always tell who’s doing a great job on the marketing team because of the feedback you hear from sales.

The takeaway: All parts of an enterprise software company should be focused on driving revenue—not just sales.

8. Sales-team leaders also need skin in the game.

On another “Sound Bites” episode, Michelle Benfer, the former SVP of sales at HubSpot, described her company’s unusual quota structure. While most companies build in a margin of error, so that a team leader hits their quota if their reps hit 90% of theirs, and the company makes its numbers if reps are hitting 80% of their quotas, HubSpot flips that script. When their sales reps hit 100% of their quotas, they’re hitting 90% of the company’s target for the quarter.

Benfer continued: “It is for me, the leader, to have skin in the game to get my people to overperform. As the leadership team it’s really on us to have our reps win first, and the company wins second.”

The takeaway: Set your sales reps up for success—and give your team leaders an incentive to help their teams overperform.

9. Describe your product to journalists like a human first, tech nerd second.

If you’re looking to pitch your product to the media, tech writer Joe Williams had some great advice on the Just Checking In podcast, the podcast about technology communications I co-host with Keyana Corliss, now the VP of global corporate communications at Tanium.

First, Joe noted that you shouldn’t dumb down your pitch in fear of being too technical. He added:

“The way to get me to cover your company is not to pitch me your CEO saying the same thing that every other CEO is saying. Reach out to me and introduce me to the product. Give me a demo. Introduce me to your engineers, to the people working on it. That more open approach is so much more advantageous in this industry.”

He also cautioned against writing the whole story for the journalist. The nuts and bolts of your tech can help them find the true ‘aha’ value of your product.

The takeaway: Set yourself apart with reporters by being human and giving them more access—not more of the same.

10. Keep media pitches short and ultra-relevant.

On another Just Checking In episode, Laura Batchelor, a CNBC senior field producer, noted that the first step to a successful pitch is to know your audience. Read the publication or watch the show you’re pitching, and make sure you’re targeting your pitch appropriately. She also said:

“Keep it super short. TV is so quick and snappy. I don’t need to have a full-fledged one page pitch with all the info I would ever need on it. I need to know what’s the headline, why does it matter to the broader industry. If it’s not a public company, can it be pegged to other public companies that can speak to the broader sector?”

The takeaway: Reporters and producers are busier than ever. Get to the point fast —and explain why your story is relevant to their audience.

11. Stay strategic about the decision to enter new global markets.

On our “Sound Bites” podcast, longtime international sales and business development executive Abe Smith reminded listeners to think carefully before expanding abroad. He emphasized having a strong and well-articulated ‘why’ before committing to a market expansion. He noted:

“What you really have to contemplate is, what’s the stress it’s going to put on the company? Is the company ready for it? And is the reward worth it for the vital few that you’re forsaking elsewhere?”

For more full-featured advice on entering global markets, check out Bill Binch’s guide Hop the Pond: A guide for expanding your EMEA operations to the U.S. Too much great advice in there to summarize!

The takeaway: You won’t make money in a new market right away, so make sure in advance that you’re expanding there for the right reasons.

12. In tech, sometimes different beats better.

Max Schireson, Battery operating partner and former CEO of MongoDB, penned a thought-provoking Substack post to counsel that real value in the technology industry comes from building different — not better, faster and cheaper.

Per Max, “Doing something differently is very different from doing it better. When you do something differently, your product can be worse for some people and better for others. Often opinions of “better” or “worse” are subjective, and users will be divided about which choice they prefer.”

The takeaway: Pursuing novel innovation, while vastly more challenging, can bear vastly more fruit.

As we enter the new year, we remain committed to navigating the challenges and opportunities ahead, alongside our valued portfolio companies and management teams, to continue to empower technological innovation, foster growth and champion success.

Here’s to a bright and growth-oriented 2024!

The post 12 Great Pieces of Company-Building Advice We Heard in 2023 appeared first on Battery Ventures.