Aligning Incentives: How To Make Sure You Have The Right Investors
Advice for Business Founders Series | Article 3
Evan Schnidman, CEO, Outrigger Group
Welcome to Outrigger Group’s “Advice for Business Founders” series, where we provide simple, no-nonsense advice on business operations topics frequently requested by our clients.
In this third installment of our "Advice for Business Founders" series, we’ll tackle the topic of investor incentives — what specifically are different types of investors looking to get out of their investment, and how can you prioritize delivering on their expectations while still running a successful business?
It makes sense that startup founders would focus heavily on their product, market, and team throughout the initial stages of their business. But one critical component often gets overlooked: investor incentives.
Repeat founders can likely tell you from experience that ignoring investors is a mistake. Keeping your investors happy isn’t just the right thing to do, it is a strategic move that ensures you have the resources needed to properly focus on other aspects of your business.
Different Investors, Different Incentives
The reason for an investment in your business can be as unique and personal as each individual investor themselves. Hence, understanding the unique expectations and priorities of each investor is critical.
Angel Investors: Ego and Vision Over Pure Returns
Angel investors often invest for a combination of reasons including ego gratification, information about an industry, or simply for return. This complex web of incentives means that I have personally seen angel investors chase inflated valuations because they believe in a company’s unicorn potential while passing on undervalued opportunities with higher return probabilities.
It is much easier for angel investors to justify the illiquidity of being an early investor in a unicorn, even if the return profile is relatively modest. Very few angel investors are purely financially motivated; they often invest as true believers in a company’s mission or its founders…or just for bragging rights.
Venture Capitalists: A Complex Decision Matrix
VCs have a much more complex decision tree than angels. Their decisions aren’t based solely on the merits of an individual company, but must also account for:
Their LPs (limited partners) and the fund’s original mandate
Internal fund dynamics (team and other investments)
Timing within the fund’s lifecycle
For example, many VCs raise a 7 or 10 year fund, so depending on when you speak to a particular VC, their priorities may be different from other funds. Later in the lifecycle of a fund, a VC may only be interested in companies that will likely have a quick exit, while earlier in the fund lifecycle they may be more patient and willing to back companies with a longer growth trajectory.
Internal decision processes vary by fund, but most are consensus-driven, with investments requiring committee approval. Some funds will even let partners angel invest in deals outside of the fund if the team does not agree to allocate LP capital. This variability means founders need to deeply understand the internal structure and timing of each VC firm they pitch.
Strategic Investors: Unique Incentives Requiring Long-Term Alignment
“Strategic investors” is a catchall that includes corporate investors, family offices with aligned business interests, and any other investors with a strategic interest. These investor groups all have their own incentive structures, time horizons, and goals for an investment.
The key for founders is to inquire about and thoroughly understand these incentives before taking on strategic capital. Unlike financial investors, strategic backers may have different exit horizons or liquidity expectations, which could impact long-term alignment.
Understanding Valuation Trends and Exit Dynamics
Regardless of investor process, it is vital to also align on valuation metrics, because the valuation multiple at which a company raises funding can drive strategic decisions from that point forward. Specifically, it is important to note that over the past few years, investment round valuations have increasingly diverged from acquisition valuations. Investors have been willing to pay much higher revenue multiples for fast-growing companies than what those companies ultimately fetch in an acquisition.
For instance, among data companies it has been common to see investment rounds priced at 10-12x ARR followed by acquisitions priced at only 4-6x ARR. This creates a fundamental challenge for founders: while investors overpay for fast growing companies, exits often occur at lower multiples once growth has slowed.
Founders need to understand this phenomenon to capture maximum exit valuation when growing quickly, or face the possibility of a smaller than expected exit in the case of a misaligned fundraising and exit strategy.
Conclusion: Aligning with Your Investors is a Competitive Advantage
Understanding and aligning with investor incentives isn’t just about avoiding friction—it’s a strategic advantage. By recognizing what drives your investors, you can tailor your fundraising, business growth, and exit strategy to meet both their expectations and your long-term business goals.
Smart founders don’t just tolerate investor relationships; they prioritize them as a key component of their business strategy. Focus on investor alignment early, and you’ll secure not just capital to fund your business, but a valuable team that is invested in your company’s long-term success.
Additional Resources:
“Angel investors vs. venture capitalists: What founders need to know” - Stripe
“Private Equity vs Venture Capital, Angel/Seed Investors” - Corporate Finance Institute
“Types of investors” - Carta
At Outrigger Group, we provide fractional executive support to help you achieve your version of success. Whether you're scaling, pivoting, or refining your strategy, our experienced team is here to offer support without slowing you down. Reach out to info@outrigger.group if you want to start a conversation.