Resource Articles

With increased transparency and competition, more than ever entrepreneurs need to be focused on building long-term sustainable businesses.  Picking the right people for your team, including employees, advisors, counsel, partners, initial customers and investors is the most important determinate of success once the venture has been funded.  As an entrepreneur for the last 20 years prior to becoming a venture capitalist, I’ve experienced firsthand the value that the right set of advisors and investors can bring to an early stage venture.

It’s important to keep in mind that raising capital is first and foremost a sales process. As an entrepreneur you have to be prepared to tell your story again and again in a convincing and compelling way that inspires confidence and is backed up with meaningful data and external validation. Who you choose to tell that story to is equally important.  While characteristics such as integrity, chemistry and shared vision of the company are essential in your VC partner, it is also important that you find an investor and VC fund that understands early stage investing and has the experience to roll-up their sleeves and contribute as a board member.

• How do their current and former CEOs rate them? Ask current CEOs and more importantly CEOs from companies they worked with previously (successful companies as well as those that didn’t have the fairytale ending) how the Partner and fund compared to others on the board in terms of ability to understand the issues at hand, constructively problem solve and add value.
• What is their track record as an operator? One of the primary rolls of the board is to help you avoid pitfalls.  VCs with significant experience as senior operators can help you emulate best practices and avoid the mistakes that they’ve made.
• Does the VC have experience in your space? A VC’s network and ability to hit the ground running are directly related to their exposure to and understanding of your market.

There are also many VC fund dynamics that could misalign the fund and company that are often overlooked:

• Do they demonstrate that they have the company’s best interests at heart? Throughout the pre-investment engagement with the fund and in particular in negotiations, there will be many opportunities for them to demonstrate that they have the company’s best interests at heart.  For example, did they try to force more money on the company than it truly needs?
• Do they invest in competitors to their existing portfolio companies? Some funds invest in more than one company in an industry, which can obviously create perverse incentives and conflict within the fund.
• Where are they in the life of their current fund? Funds typically have a 10 years investment horizon, the average time to liquidity for a company has been more than seven years but the recession and recent events in financial markets are likely to drive that even higher.
• What is their reserve policy? If funds don’t reserve enough to participate in future rounds, it can be problematic at the time of follow-on rounds.

Syndication is an added layer of complexity, and while it can make the investment process slightly slower, it often has significant advantages post-investment.  Most importantly, you will have more than one firm’s resources at your disposal including networks, people and points of view.  As you evaluate possible combinations of funds for syndication, pay attention to the dynamics that could create a misalignment among the investors.  It is generally best to have a syndicate of similar/complementary funds from a size, stage and investment strategy perspective.

Strategic investors can often provide advantages to later stage companies, but should be viewed with caution in an A round.  Companies at this early stage generally have not yet developed a broad identity within their customer base and the affiliation of a strategic can often cloud external perceptions of the company.

There are hundreds of venture capital firms out there and you will likely hear similar stories.  To find the best fit for your company, do your homework and choose wisely.  You only have one opportunity to pick your initial investors.  It’s a good investment of your time to pick the fund and board member that’s right for your business.