Investors Should Buy Into A Give First Strategy

give first strategy

Increasingly I have come to believe that investors in more successful startup ecosystems like San Francisco think differently than people in less successful ones like the ones in Cleveland. Of course, I am not the first person to think that. What may be different, however, is the way in which I believe they think differently. I think that the heart of that difference is the willingness to give first.

Give First Strategy For Investors

Like the character Trevor McKinney in the 2000 movie Pay It Forward, investors in successful startup ecosystems give freely to help founders. They think about “paying it forward” by doing good deeds for entrepreneurs in the ecosystem.

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In less successful ecosystems, investors take a “what’s in it for me” attitude. Instead of paying it forward, they seek to extract maximum benefit for themselves. I think this philosophy hurts the development of startup ecosystems.

In a recent blog post, Morris Wheeler advocated a give first strategy. Rather than asking yourself “how can I gain from this interaction,” people, he said, would be better off asking themselves “how can I help?” As Morris put it, “the ‘returns’ of helping without expecting anything in return, far outweigh what you might have asked for in the first place.”

While all the players in the ecosystem should adopt this strategy, I think it is particularly important that investors do. In less successful ecosystems, entrepreneurs don’t have as many financing options as they do in more successful locales. If local financiers are selfish, would-be entrepreneurs will be driven away. They will either do something else with their time or they will take their ventures to greener pastures.

Let me be concrete about some of the ways I think that investors can implement a give first strategy in ways that will improve the startup ecosystem.

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1. Provide feedback to entrepreneurs: Telling someone you will not finance them is okay; it’s the name of the game. But if you aren’t going to invest in someone’s company, you should tell them why. It helps the entrepreneurs improve. If you think the venture doesn’t have a complete team that suggests a different course of action than if you think the valuation is too high.

2. Make quick decisions: An entrepreneur’s time is his or her most valuable resource. Don’t waste it by asking questions that cannot be answered until long after the company has received seed financing. You can’t know the right price for a product that has unknown features because it hasn’t been built.

3. Provide referrals: If you don’t like a company because it’s not a fit for your investment strategy, then tell the entrepreneur that, but then suggest a couple of other people who might fit, even if those people are in a different region.

4. Offer founder-friendly investment terms: Early stage investments should be structured to give the founder an incentive to build a successful company, not to protect the investor’s downside. Without an incentivized entrepreneur, new companies will fail. Increasing the odds that someone will fail to ensure that you have protection when they do seems like a foolish approach to investing.

5. Connect founders with customers and suppliers: Unless you are backing a company’s direct competitors, there is no reason why connecting founders with potential customers or suppliers will hurt you. But an introduction to a customer or supplier could go a long way to getting a brand new company moving forward. So why not make the connection?

Startup Photo via Shutterstock

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Scott Shane Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool's Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: and The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By.

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