All venture capitalists are not created equal. The common denominator in our fundraising venture capital equation is capital, or investment dollars. That is the “what” in our equation — the known. Yet there are several variables: the “how,” the “where” and, to a certain extent, the “why” — which all lead us to the “who.”
Answering these questions is a process of applying a filter against the universe of venture firms to determine the subset that is most likely to have an interest in your opportunity. It is essential for entrepreneurs to do their homework in advance. Time is your most precious commodity and you can waste a lot of motion while creating little or no momentum if you don’t approach the venture community with a deliberate plan.
Step One in the filtering process is understanding that each venture fund has a set of parameters through which it views potential opportunities. They include:
Area of business focus (e.g. IT, healthcare, consumer, and media)
Location (many firms prefer investments in specific geographies)
Stage of investment (seed, early, growth, expansion)
Calling on a venture firm with investment screens that preclude your opportunity is a waste of your time. Invest in developing a short list of suspects that pass this first filter.
Step Two is to further narrow your list of suspects based upon:
- Firm expertise (how likely will it understand your value proposition and “get it?”)
- Potential conflicts (is the firm’s expertise a by-product of an investment in a potential competitor?)
- Available capital (does the VC firm have the capital to participate through a series of financings?)
When examining expertise, look to the specific partner within a firm with that expertise. “Firms” typically don’t add value – specific partners do. There are exceptions, my firm included. We invest as a team, but make sure you know the difference. Potential conflicts are important to identify in advance, as you don’t want to spend your precious time educating an investor with a potentially competitive investment. Similarly, a fund at the end of its life may not have the capital to support you through the growth of your company.
Step Three is determining each firm’s reputation with fellow entrepreneurs:
Do they add value?
When things get tough — and they will — are they part of the solution?
Are they helpful in fund raising? Are they proactive supporters?
Would entrepreneurs who have worked with the firm work with them again?
You might not always have the luxury of picking your investors, but at least start with a prioritized list of who you would “prefer” to work with. Partnering with a venture firm is a long-term commitment: know what you are getting into and be forewarned. Don’t be surprised.
Step Four is to now sort your list based on who you want to be working with and then get a “warm” introduction to the specific partner within each target firm.
Venture firms look at hundreds to thousands of potential investments per year. Typically, less than 1% of the prospective investments a firm evaluates will secure financing commitments from that firm. The odds are long indeed. The warm introduction by a “trusted” affiliate of the venture firm is more likely to get you to the top of the pile of potential investments. The more trusted the introduction, the faster you are likely to get an initial reaction — positive or negative. A positive result leads to a meeting. A negative reaction is an opportunity to gather further intelligence — probably via the trusted affiliate who made the initial introduction. It is essential to learn from a qualified “no” so that you can tune and improve your fundraising pitch.
In my experience, entrepreneurs are often better served by having an investment syndicate rather than a single investor. This gives your company access to a broader spectrum of investor experience and networks; it also provides for more balance among the investors in their interaction with a company and its management. A syndicate can also provide deeper financial “bench strength” to support a company when more capital is required — either because things are going slower than planned or because an opportunity to accelerate growth presents itself and there is a need or desire to move quickly. Of course, forming a working syndicate requires managing the above process in parallel with multiple firms AND finding firms that are compatible with one another. Yes, venture firms themselves also realize that all venture capitalists are not created equal.
Bob Ackerman is the Founder and Managing Director of Allegis Capital and formerly a successful serial entrepreneur. In his spare time, Bob teaches New Venture Finance at the University of California, Berkeley in the MBA program and is active in the non-profit world, focusing on education and the arts.
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