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Most times, raising capital is a tough haul. Endless pitching, grueling due diligence and an enormous commitment of time and money is usually required.
But once in a while there is a company that rises up and grabs the attention and the imagination of a swarm of venture capitalists (VCs) in a relatively short period of time. Maybe they stayed in stealth mode, quietly assembled a rock star team and signed a few big name customers and took the stage at an event to showcase their progress. Or it’s possible that there’s already too much business for them to handle or perhaps their technology is world-changing. Whatever the reason, something is clicking that has made the VCs sit up and take notice.
Each VC learns of the deal around the same time and the race is on. They stay up late reviewing the information the company provides. In the morning, the deal wakes them. The deal is waiting and it’s time to move. They brush their teeth and think through the capabilities and gaps in the management team. Showering is completed with a blank stare as competition is considered. They pull on their khakis and consider the approach to market. They reach for a blue shirt which hangs beside 10 other blue shirts and ponder deal structure. Eggs are swallowed with little chewing, there’s coffee in a travel mug and an absent-minded forehead kiss to a spouse who knows the drill.
It’s full-on for all involved. The VCs want a lot of information from the entrepreneurs but in this deal they know they’ll have to be more flexible and ready to move more quickly than they’d like if they think they might lose it to another VC. The dumb entrepreneurs are flattered by the flurry of attention and often gain a company-crushing ego from all the activity. The smart entrepreneurs become Spock by remaining calm and logical, but one of the more difficult decisions for these entrepreneurs during this period is deciding which VC is best for them. They all talk a pretty good game and if you haven’t been through it before, how do you know? There are several things to consider.
Most venture capitalists try to differentiate themselves from other venture capitalists by telling the entrepreneur that they have great networks which help you out when you need new team members or introductions to prospective customers. Start by taking a look at their portfolio which is usually showcased on their website. First consider the number of companies you see there compared to the number of partners in the fund. Each partner is responsible for their share of portfolio companies. If each partner has more than six or seven companies for which they are responsible, they likely don’t have a lot of time to help you out. If that’s the case, they’ll just be money. Speak with those portfolio companies and find out what kind of people they are. Did they help at all? Did they do anything more than just bring cash to the deal? Did they stay calm when things went wrong? Do they understand the space in which you work?
All VCs are a little different from the next so you’ll also want to learn their philosophy. If they’re chasing trends, stay clear. Some VCs are very intent on backing the founder and will stick it out with him/her for the long term, others are not. If the VCs want to syndicate the deal, find out if they have ever invested together before.
Trust me, it matters. Not only do you need to make sure that your interests are aligned with the VC from whom you are taking some cash, but you need to make sure that the interests of the VCs are aligned with each other as well. VC funds are generally 10-year funds, which means that they need to invest the committed capital of the fund and get their exits within that time frame. If one fund is new and the syndicating fund is into their fifth or sixth year, this could have some complications when one fund thinks it’s time to sell the company and the other wants to build out a few more years. Find out if both or all the VCs are in sync on the strategy for the company. Board meetings become quite ineffective when there is not alignment around the table.
Then consider the team of the VC as a whole. How long have they worked together? If it’s a new fund with a group that hasn’t worked together before, you could be facing a whole other set of issues downstream as they fight amongst themselves and self-destruct. If this is their second or third fund and they have made good returns for their investors, it’s likely they know what they’re doing.
Almost all VCs I’ve met are good people. They’re typically people who have a lot of experience growing companies and they have a positive outlook which makes them interesting and likable. Entrepreneurs who complain about their VCs are sometimes justified. But other times they remind me of that guy who buys a car without any due diligence and later is mad when it lets him down. All VCs are not created equal. Go forth and prosper.
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