Here are my key factors based on over two decades of global experience in markets like: San Francisco, New York, Sydney, London, Taipei, Singapore and others.
I think every Founder or Startup needs to consider when looking to ‘bring on’ a Venture Capital Firm (VC), after closely evaluating the following eight (8) points. e.g. Partners, Location, Sector Preferences, Stage Preference, etc. (read on below)
Startups based in California, New York, and Massachusetts account for most of the VC tech funding in the United States. However, hotbeds of startups and innovation are booming by VCs across the US. But, California saw $6 billion more of VC funding than all 49 other states combined.
Picture: Welcome to California’s tech-centric brain pool. Wrapping up San Francisco Bay and Silicon Valley. Home base for the heart and soul of computer technology, including silicon chip technology, computer design, apps and Apples, smart phones, Facebook, Uber, AirBnb—smart everything.
On the topic of identifying the best VC for you and your startup, I think you must start developing a list of VC, Angels and Investors from Day One. The most common methods I can recommend are:
- Loop back immediately with all your friends, classmates or colleges that are VC’s.
- Get introduced directly via friends and family, which is also a powerful method
- Meet them offline or online at conferences, meeting, seminars, LinkedIn, personal blogs, Industry events, etc.
- I have always found, in most countries, Attorneys/Lawyers, accountants, consultants and other Board Directors are a great way to reach out to VC’s too.
- And the least recommended and probably the worst way is to ‘Cold Call’ them directly. (I can’t recommend this option)
I personally look for: Honesty, Respect, Rapport and Loyalty with a VC first – it is also my single most critical area before accepting any investment funding and commitment.
At the end of the day, you will need someone that you can have heated debates with in times of success, winning and prosperity BUT, you need to have ‘partner’ that stands close even in times of turbulence, pressure and stress.
I also think the best VC’s today besides being leaders are also able to inspire people to act and also bring a fantastic network of professional connections e.g. Attorneys, other investors, other Board Directors, Merchant Banks, etc.
It is critical to have this rapport from the ‘get go’ and even discuss issues like ‘burn rate’ and other unexpected financial issues with rapid scaling and costs associated with global marketing, scaling worldwide and expansion.
Once you prepare your business plan, financials, marketing, due diligence pack and presentation materials, the next part of the process of raising venture capital is to find the right venture capital firms.
While this may seem simple, it isn’t. There are thousands of venture capital firms in the United States (especially in CA and NY) alone, and going after the wrong ones is one of the most common reason why companies fail to raise the capital they need.
When seeking a venture capital firm, here are my key eight (8) criteria to consider:
Venture capital firms are comprised of individual partners. These partners make investment decisions and typically take a seat on each portfolio company’s Board. (Note: that companies that VCs fund are known as “portfolio companies.” – this should also be one of the first things you review too)
Partners tend to invest in what they know, so finding a partner that has past work experience in your industry is very helpful. This relevant experience allows them to more fully understand your venture’s value proposition and gives them confidence that they can add value, thus encouraging them to invest.
Note: The New York Times and used the CB Insights Investor Mosaic algorithm to develop a data-driven ranking of the top venture capital partners. Here are the top five (5) above
Most venture capital firms only invest within 100 to 200 miles of their office(s). By investing close to home, the firms are able to more actively get involved with and add value to their portfolio companies.
For an example, SV Angel in California is Most Active VC By Unique Tech Investments In Each US State 2011 – 2016 YTD (5/9/16) Source: CB Insights URL: https://www.cbinsights.com/blog/most-active-tech-venture-capital-firms-us-map/
- Sector preference:
Many venture capital firms focus on specific sectors such as Fintech, healthcare, information technology (IT), wireless technologies, etc. In most cases, even if you have a great company, if you fall outside of the VC’s sector preference, they’ll pass on the opportunity. Sadly… but this happens!
- Stage preference:
VCs tend to focus on different stages of ventures. For instance, some VCs prefer early stage ventures e.g. Series A or earlier, for example companies with no revenues, where the risk is great, but so are the potential returns. Conversely, some VCs focus on providing capital to firms to bridge capital gaps before they go public. If you are a startup, make sure you do your research and don’t waste your time.
Typically, Series A rounds raise approximately $2 million- $12 million, but this number has increased on average due to high recent tech industry valuations, or ‘unicorns’.
The investors involved in the Series A round come from more traditional venture capital firms. Well-established venture capital firms that participate in Series A funding include: Sequoia, Benchmark, General Catalyst Partners, Greylock, Accel, Lerer Hippeau Ventures, etc.
Just as you should seek venture capital firms whose partners have experience in your industry, the ideal venture capital firm has portfolio companies in your field as well.
In fact, a VC may ask the management teams of their portfolio companies about your venture since these individuals are industry experts. In addition, if your venture has potential synergies with a portfolio company, this may significantly enhance the VC’s interest in your firm.
Most Founders and their companies seeking venture capital for the first time will require subsequent rounds of capital. As such, it is helpful and beneficial, if the VC has “deep pockets,” that is, enough cash to participate in follow-on rounds. This will save the company significant time and effort in raising future funds. The consistency and familiarity makes a huge impact too.
Importantly, besides assets, I always love to ensure they also have a great global network too. Today, with companies like: WhatsApp, Amazon, Facebook, Netflix, Uber, Airbnb, etc. when you need to grow really, really rapidly and accelerate your growth. The science and art of rapidly building out a company to serve a large and usually global market, with the goal of becoming the first mover at scale. This is why the right VC is critical today too.
- Recency of performance/Track Record:
I always focus on this metric too. Just like any sporting team or successful company, you need a fantastic record TODAY , not just past glories!
- Cultural and Structural Fit:
As mentioned previously, entrepreneurs and venture capitalists are partners. That is, they generally work very closely together to achieve a common goal (growing a successful company and getting to an exit). As such, it is critical that there be a good personality fit and ability to work together between the VC and the founder/management team.
Finding the right venture capital firm is absolutely critical to companies seeking venture capital. Success yields you both the capital your company requires and significant assistance in growing your venture. Conversely, failing to find the right firm often results in raising no capital at all and being unable to grow your company.
Finally, I personally think when you start ‘short-listing’ your potential VC list, you must also factor these elements into your plans and discussions too:
- Network centrality – connectivity to other investors. Think of it as akin to Google Pagerank.
- An investor’s exits – the frequency/volume, size, and stage of entry
I wish you continued success. Stay passion and always PLAY BIG.
In conclusion, and I will reiterate – momentum and consistency are critical during your launch, start-up and growth/scaling phases. But to be laser clear and focused remember, that investors and VC’s care about management, markets & products/service and WHY. They invest in deals where they can own enough to make it worth their time – thus “money.” (Usually a minimum of 10X) And all of this is wrapped up in forward progress and momentum, that you must consistently demonstrate over time.
LIVE WITH PASSION + PURPOSE.
Make your difference.
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