Being an effective guardian
The roles and responsibilities startups and VCs have to each other.
“Fiduciary” – A fiduciary is a person who holds a legal or ethical relationship of trust with one or more other parties.
The title “fiduciary” is bandied about a lot in the finance and legal sector as a whole and is often used in the sales process to convince someone you will or are acting in their best interest. We prefer to call it “Guardianship”
When it comes to venture capital, I hear it less frequently, but that doesn’t mean it doesn’t apply to our creative form of finance.
We think a lot about our role as a guardian for our investors, our portfolio companies and our overall role and responsibility in the market. We deeply respect and carefully this position of privilege and honour.
As the late Stan Lee once said, “With great power comes great responsibility”.
This responsibility drives the tough decisions that we have to make daily, especially when it comes to choosing which pitches we want to take forward into due diligence.
In this piece, I explore how we perceive and manage our guardianship role within our world.
The guardian role of a fund manager – the basics
As the Managing Partner and fund manager of Hillfarrance, I have a strict duty of care to our investors. The investors that choose us to be custodians of their hard-earned capital. This duty includes things like:
- Ensuring that our LPs are fully aware of and embrace the risks of startup investing.
- Make sure that we are only accepting funds from high-quality investors and those that pass our KYC and AML processes.
- Maximising value for our investors by not getting the lowest price but by ensuring the investment opportunity is subject to an extensive due diligence process that results in a logical reason to invest.
The guardian role of a fund manager – going the extra necessary mile
At Hillfarrance, we believe that being an effective guardian extends well beyond these hygiene factors:
- Ensuring that we are investing in a broad cross-section of entrepreneurs who are united not necessarily by a certain segment but instead by a common sense of ambition that is matched equally by the heartiest amount of hustle. At Hillfarrance, this includes equal consideration and respect to underrepresented and over-represented ethnographies.
- Deep-rooted respect for where our LP’s capital originates from and what they expect to achieve from their investment. We have investments from families who have achieved wealth through immense hard work and over many years. We have investors representing communities and taxpayers who need us to invest wisely to support pension schemes and welfare. We have individuals who are deeply committed to supporting the New Zealand entrepreneurial sector and look to us to provide diversification to supplement their direct startup investments. We also have investment from the Hillfarrance team, who believe so passionately in our mission that they place a significant portion of their net worth into the business.
- An identical depth of respect for the founders and companies that we invest into. Understanding their aspirations, ideologies, limitations and privacy and ensuring that boundaries are never crossed is paramount. In return, we ask for absolute transparency, respect for our fiduciary duty to our investors and an appreciation for our own goals as a business.
- In the case of Hillfarrance, we will never accept the role of a passive investor. Offering capital is only the start. It is what you do afterwards to help your startups grow that defines the returns of the fund, plus it is the most fun part of our job.
- Never forgetting or going outside of the promises we made to our investors and founders in the onboarding process. Essentially, this means investing within the sectors and stages that we stated in our fund documents or fulfilling the promises we made when negotiating with founders. Put another way; we will not put 25% of our funds into NFTs or renege on making the connections you need.
The guardian role of a portfolio company founder
We think of seed stage investment (which is often a ten-year plus relationship) as akin to entering into a type of marriage. Great relationships are built on trust and mutual respect – we expect the same from our portfolio company founders, and they can expect the same from us.
Once an entrepreneur’s funding round is closed and the money is in their corporate account, the founders can largely spend it as they see fit. However, it isn’t necessarily “their cash”. Responsible entrepreneurs that we know acknowledge the source of their investment capital and understand and work with their investors hand-in-hand to ensure it is respected and maximised. Equally, good investors do not micromanage budgets and check their spending at a minute level. They have a deep trust in the founders and their financial acumen. If founders can get both sides of this equation right then, everything will go swimmingly.
We understand that it is much more satisfying to deliver good news to an investor than the other stuff. But we are always keen to hear how things are not working out as much as those that are. To this end, we expect our portfolio to report regularly on how things are progressing. We fully support the notion of founders owning their remaining runway and using it to enhance the parts of your business that are most closely aligned with their valuation:
- Recurring revenue and cross-sales
- Defensible IP generation
- New business pipeline
- ESG performance
- Attracting the best talent.
We have just begun using Visible to help with our portfolio company reporting, and a number of the startups we have funded also use it. It is a simple and elegant product that frees up a lot of time to be used on more revenue-generating projects.
The guardian role of a service provider to a portfolio company founder
We don’t need to treat startups like charities, but we ask all service providers to take a long-term view on pricing and margins. We don’t expect any service provider to do things for free, but we do ask that they take into account the fragility of a startup’s financial runway.
We have seen numerous suppliers, especially in the creative services end of the market, quote almost 10% of the total pre-seed round of a startup to complete a branding review. Whilst we never want a supplier to lose money from a customer relationship, we encourage them to look at startups as a way to pay things forward. Offer longer payment terms, a significant discount now that will be remunerated when the startup hits scale, or a more ‘lite’ version of the core services they deliver is what’s needed but perhaps without so many bells and whistles. If the startup becomes a success I am pretty confident you will have a client for life.
One of our investors and I recently discussed the reality gap between the ‘startup industry’ and actual startups. It was an eye-opener. There are numerous organisations, clubs and businesses that thrive and monetise from the latest fascination with startups. Many of them are legitimately trying to help and answer to a higher moral calling; however, there are some that just consume the oxygen in the market and replace it with very little else. If I were building a startup service provider business now, I would focus on initiatives that directly connect me with committed founders and build an in-depth appreciation of the things that are most important to them. One acid test that we now run is to find out if the organiser of the club or community has actually founded/worked at a senior level in a startup before. If yes, then we consider it. If not, we think again.
Our role as a guardian of the planet
As evidenced in recent weeks, the effects of the industrial revolution through to today are having a visible impact on our lives and the natural ecosystems surrounding our towns and cities. We believe startups that are free of the shackles of public markets and back-room deals will generate the biggest advancements in tackling climate change.
On a social level, there is still mass JEDI disproportion within the founders that are funded by VCs. We have seen recent efforts overseas to address this with gender and ethnicity-focused funds; however, they still represent a tiny proportion of the total capital raised for startup investment. With just under 50% of our Village being founded by women, we are making strides in the right direction but still have much to do regarding diversity.
From a guardianship standpoint, we believe that professional investors are obligated to society and the planet and not to fund innovations that severely affect our well-being.
Our role as a guardian of the overall startup ecosystem
Venture capitalists and startup founders are in symbiosis with each other. A startup’s success determines the success of the VC and vice versa. Many of us VCs bootstrap for years until we hit a carry cheque. We do what we do because we love it.
Without wanting to sound arrogant, I see both of us as being the keystone species in the startup ecosystem. As proven by nature, keystone species have low functional redundancy. This means that if the species were to disappear from the ecosystem, no other species would be able to fill its ecological niche. The ecosystem would be forced to change radically, allowing new and possibly invasive species to populate the habitat.
This is where the potential for unscrupulous funding behaviour emerges and the opportunity for all sides to end up in a less favourable position.
By demystifying the venture funding process with content and templates, we hope to continue to level the playing field for entrepreneurs and investors, ensuring a healthy ecosystem for many years to come.
Coming back to Stan Lee’s quote, the great power and responsibility that we wield should be harnessed to raise our ecosystem to higher levels. Whether it be through open source tools that democratise responsible startup development and funding or by just having an open door for entrepreneurs to pitch, we all need to do our bit. Ivory towers, tall poppy cutting and protectionism, end up helping nobody in the end.