How to choose your VC


From my many years of mentoring founders I’ve seen them spend inordinate amounts of time polishing their investor pitches, yet very little time choosing their investors.

Finding the right investor is similar to finding the right job. Of course you want to polish your resume and tailor your cover letter to the company you are applying to. But you should be spending just as much time or more deciding where it is you want to work and who you want to work with.

Of course, one big difference is that it is far harder to land a VC investment than to find a job.  According to the article in Forbes by Dileep Rao Why 99.95% Of Entrepreneurs Should Stop Wasting Time Seeking Venture Capital:

The reality is that most ventures do not qualify for venture capital and never will. According to the Small  Business Administration, about 600,000 new businesses are started in the U.S. each year, and the number of startups funded by VCs was about 300. This means that the probability of an average new business getting VC is about 0.0005 (300/600,000), and it also means that 99.95 percent of entrepreneurs will not get VC at startup.

But no true entrepreneur lets long odds stop them, right? So let’s assume you have what it takes to land a VC investment: world class team, breakthrough technology, the opportunity to totally disrupt a multi-billion dollar market, AND you have a rapidly growing, fully engaged customer base. What should you be looking for in a VC? One of the good things about VCs – and trust me, there are good things beside money, but that’s for another post – is that they want to be found. So their web sites are very informative, they list the team and their backgrounds and the companies they have invested in. Often they will often tout their IPOs and acquisitions as well. Many have blogs and virtually all have Twitter accounts. Stud what they have to say about themselves and what others say about them!

  • Geographic location – many top tier VC maintain multiple offices: Silicon Valley + n. Where n can be Boston, New York, Austin, etc. Back in my day no VC wanted to invest in a company more than an hour away from their office – too time consuming to attend board and other meetings. This seems to have changed, but all the same you want your VC to be on the same coast. So if you are in Boston, confine your search to firms with offices in Boston and New York. If you are in San Francisco you should concentrate on Silicon Valley, but don’t ignore L.A.
  • Top tier firm – there are many rankings of VC firms. You can start with CB Insights.  A bit more Googling and you should have no problem putting together a target list of firms in your region. Top tier firms are a lot more choosy but they can do a lot more for you than a mid-tier firm. After all, if your venture is world class you want a world class VC, right?
  • Portfolio fit – Some VC firms have a particular strategy or target markets. But the best way to really understand their investment strategy is to reverse engineer it from their portfolio.  The simplest cut is B2C vs. B2B. Past that you want ensure yourself that whatever you do – say data analytics for farmers – fits in with the firm’s portfolio. But make sure you aren’t competing head to head with another firm. Again back in my day firms wouldn’t invest in two firms in the exact same market segment who would view each other as competitors. While this has changed somewhat I wouldn’t advise you go after a firm that follows that practice. So this is going to require work, you need to wade through a lot of portfolios. And make sure you differentiate between recent funds and older funds. Firms with long histories like Greylock and Kleiner Perkins have had many, many funds. You should be checking their more recent fund, as firm strategies and partners do change over time.
  • The partner – Within firm’s partners tend to specialize. They also range from grizzled veterans to newbies. Find the right partner is critical. She or he is your point person to the firm and will be sitting on your Board. You’ll be entering into a business marriage with this person which could last 5 to 7 years, even longer. Divorces are painful. So again, you can find rankings of VCs by how successful their investments have been but you need to dig deeper. Once you’ve found a few target funds and the partners that specialize in your market segment start using your network to find founders who have worked with this partner.
  • Stage – If you are looking for a seed investment there is no point in trying to talk with a firm that only makes large follow-on investments. Similarly if you need a lot of capital a seed investor won’t be able to provide it. So before you even start you need to determine a range for how much you need to raise – it should last you 12 to 18 months – and how much you will eventually need to reach lift-off. VC funds are rocket fuel – the goal is to reach escape velocity and start scaling logarithmically not linearly. Make sure your total capital needs are a match for the firm you target.
  • State of fund – More than once I’ve found a VC firm that was highly interested in my venture but was in the midst of raising a new fund and had to reserve the capital in their existing fund for follow-on investments in their portfolio companies. Don’t get caught in this death valley. Assume you are going to need at least three rounds of investment and your target firm can do that and more.
  • Syndication – VCs often like to invest with their peers, though again this may have changed somewhat recently as bigger funds get greedier and want the entire round. But do your homework and find out if your target fund often syndicates their deals with the same funds. Because you better be comfortable with those VCs too, as they are likely your Series B lead investor.
  • Institutional or corporate – Read my post on The pros and cons of taking corporate VC money before you decide to go this route. But the sheer numbers will lead you to institutional VCs, there are so many more of them than corporate VCs.
  •  What can the VC do for you? Read my post Everybody’s money is green.

There even more that can be said – their are entire books about VCs – but the key take-away is to be selective, just as you would be when job hunting. Use your network to get warm intros. You wouldn’t spam the world with your resume, don’t spam investors with your deck. Get a warm intro, then send an email with your exec sum asking for a meeting where you can present your venture or better yet show off your demo or prototype. And be patient. It can easily take 6 months from the time you start to the time you have a check in the bank. So get to work. Just like finding a new job is a full time job, finding a top tier investor is a full time job. But you already have a full time job running your venture! Welcome to the world of startups, you are going to have at least two if not three full time jobs for quite some time.

Finally, while there tons to read on the web, here’s one book that required reading for VC seekers: Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist by Brad Feld

Author: Mentorphile

Mentor, coach, and advisor to entrepreneurs, small businesses, and non-profit organizations. General manager with significant experience in both for-profit and non-profit organizations. Focus on media and information. On founding team of four venture-backed companies. Currently Chairman of Popsleuth, Inc., maker of the Endorfyn app for keeping fans updated on new stuff from their favorite artists.

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