After spending several years at Greylock Partners and raising multiple rounds as a startup founder, I can tell you that VC is very much an insider’s game. Here are my tips to give you an edge.
Learn the process
Because of the inside nature of VC, you need to know what you’re doing before ever making contact. I’ve talked to many first-time founders as they’ve started their fundraising process, and I am continually surprised by the information asymmetry between these entrepreneurs and VCs.
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A VC friend of mine described this gap, saying, “I think the industry is intentionally designed this way as a test for founders. VCs want to see if entrepreneurs can be resourceful enough to figure out how the game is played.”
To overcome the knowledge deficit, call on founders you respect who have already raised similar rounds. You’ll find founders have different philosophies on everything from how much to raise to what type of partner to choose. Talk to enough folks to be able to form your own opinion.
Weigh the pros and cons
Think about the type of capital partner you want. Start by considering firms that fit your current stage. Early-stage investors tend to have smaller funds, so the checks they write will represent a sizable bet for their total fund.
These firms are more motivated to get the company to the next stage. They’re rolling up their sleeves, working their connections, and making introductions to customers, partners, talent and more on your behalf. They understand hustle and grit.
For a multistage fund, that same first or early check is a drop in the bucket. Often, it might not even require full approval by the partnership, which is telling. VCs at these firms are buying a call option to invest in the next round.
They have less skin in the game and are less likely to go to bat for you. It’s also worth noting that many multistage firms are now investing earlier and earlier in the hopes that one of these early-stage bets will break out, and they’ll have a shot at leading the next round (where they can buy up on ownership). But statistically, there’s only about a 25 percent chance that they’ll do so (which obviously varies a lot by fund). They’ll have the most information of any potential investor, and if they don’t invest, it signals to other potential investors that they didn’t think your company was a top performer.
This isn’t always the case, and there are certainly exceptions (multistage investors will argue against this vehemently), but it’s a real consideration.
Still, multistage funds are not always a bad choice for your first/early rounds. They structurally have the ability to preempt your next round, which if they do, saves you a fundraising cycle and allows you to double down with a partner you already know and love.
Let’s be real: All partners are not equal within a firm.
As such, you need to know where any potential investor stands. Are they a power player or a rising star? Can they pound the table internally and rally their partners to support you? Will the VC be able to confidently stand by your side and not succumb to pressures from their partnership?
Sometimes you might be better off having the leader from a Tier 2 VC firm lead your round than a junior person at a Tier 1.
You’ll want to consider whether the person you want to work with is likely to stay at his or her current firm. There is no way to fully know this, but there are clues.
If they’re a rising star, they may move to another firm, or if they’ve already made their career, they may be ready to move on to other interests.
If this happens, you become what is called an “orphaned” company. Another partner or junior associate might take your original backer’s place, but this isn’t the person who originally believed in you.
If you sense a potential partner is on his or her way out, you may want to look elsewhere.
Run a tight timeline
Set a clear timeline for when the fundraising process will end—and stick to it. If you don’t set an end date, investors may continue to spend time with you, but there will be no reason for them to advance a deal.
They can wait and see what demand looks like for your equity (hanging around the hoop). Again, for them it’s just about buying more optionality.
You need to create a distinct moment when VCs have to decide if they’re in or out. To help this along, think about the cadence within your timeline of engaging VCs that are likely to lead.
Securing leads is essential to tipping the round. The others will follow.
Structure your term sheet and close the deal
It’s not just about who you get around the table, but how you structure your round.
Novice founders are sometimes tempted to include several firms as co-leads. While it may feel like more people and brands would be a good thing, it’s usually not. What ends up happening is each investor has less skin in the game so they are less likely to spend cycles helping you.
Rounds without a clear lead are “party rounds.” It can be easier to raise such a round—consisting of a lot of small checks—because the diligence hurdles and the personal commitment are lower, but none of them are really invested in you.
It’s better to have a clear lead (or two, max), and then round out your raise with smaller firms and angels who typically follow with smaller checks.
Lastly, it’s important to remember: VC funding is just the means to the end of building your business, nothing more.
“Winning” here is finding the best capital partners—with the least time and distraction to you—so you can get back to working on your real goal: creating and scaling value for your customers.
Illustration: Dom Guzman
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