How the H:CS ratio can help you find the right investor for your business

One of the most critical aspects of building a startup is choosing the right investors. Just like choosing a spouse to marry, get it right and you’ll have a wonderful, supportive partner alongside you for the ups and downs of the journey. Get it wrong and you could be in for a rollercoaster.

In the current environment, when fundraising is tougher than it has been in a while, this becomes even more important.

At Side Stage Ventures, we think a lot about a concept called H:CS or Helpfulness to Cheque Size ratio, originally coined by my friend & Pipe founder, Harry Hurst.

What does this mean?

Well — not every dollar invested is created equally. The equity in your company is valuable, so when you are ‘selling’ it, you should be optimising for the value that comes with each dollar.

Some types of investors tend to have higher H:CS than others but, in general, the more support and value you get for the fewest dollars invested, the better!

The depth of knowledge and experienced strategic angel investors

In my experience, the highest concentration of H:CS comes in the form of strategic angel cheques. You might have angels who are deeply experienced founders and operators, understand the space better than anyone, and are investing $10,000-20,000, but bringing an enormous wealth of knowledge and expertise with it.

The hustle and commitment of a small, first-time fund

Small, first-time funds with hungry and hustling founders and operators also tend to have a high H:CS. This often manifests as lots of time and hands-on support, even with a relatively small <$500,000 cheque size. Many times you’ll find that your startup’s value to a smaller, first-time fund is greater as a proportion of their portfolio than it is to a larger fund.

Of course, there are exceptions here. Funds that write big cheques can also have a strong H:CS especially when you’re working with a partner who is truly committed to your journey or knows the space particularly well.

Geography and proximity can be important too

H:CS is not totally binary though and there can be other factors that impact the score such as geography proximity and availability. Building startups is hard. Building strong relationships remotely is hard too. To really maximise the H:CS ratio it helps to be close by and be able to spend quality time with your investor — it’s generally a lot harder to do this from afar.

Optimising for H:CS

Don’t be fooled into thinking bigger is always better when it comes to cheques.

We find that the best cap tables are filled with a mix of investors with high H:CS scores. Getting the right blend of funds (big and small) and angels who can provide you with the support, help and commitment you need can be invaluable, especially in those early days of building.

There is no one size fits all or single rule to follow but be sure to ask the right questions. Some of the best things you can do during the diligence process are to ask for help, intros and advice. The diligence process should work both ways — ask for introductions to angels and other funds, ask for introductions to customers, and test the extent to which the fund will support you, even before they have invested.

And do your own research — ask other founders in the firm’s portfolio. Dig a bit deeper, don’t just look at the front page of the website or the breakout successes, ask the founders of companies that didn’t work out.

The best funds and people behave well (and reference well) across the board regardless of whether there was an optimum outcome.

The past couple of years have been challenging for founders and VCs alike and more than anything, it has shown the importance of having the right people in your corner when faced with the inevitable challenges and roadblocks along the journey.

At Side Stage Ventures, we deliberately optimise for the H:CS ratio. We’re proud to have a deep network of some of the best (and most helpful) founders and operators in Australia and around the world. We also purposefully write ‘small’ cheques so founders should be getting lots of value per dollar invested.

If there is one takeaway from this for founders it is — as you are completing a round and thinking through who the right long-term partners are and what the composition should be, consider the H:CS of each investor, ask the right questions and you’ll undoubtedly build a stronger cap table all round.

Ben Grabiner is the co-founder and general partner at Side Stage Ventures.