Fact or Fiction: The Biggest Misconceptions about VC Funds
With so many new ideas and companies being founded every year, Venture Capital (VC) is always one of the primary funding options when startups want to scale-up and grow. And although many VC funds exist globally each with their own strategy and preferences, there are several misconceptions about VC Funds and how entrepreneurs should interact with them.
I have heard them all, but these are the main ones I wanted to clarify.
- All VC Funds are the same-Fiction: Entrepreneurs often think their ideas are equally appealing to all investors and if one VC fund states an opinion about the investment then all VCs should follow suite. Each VC fund has different parameters ranging from investment stage, industries preferred, ticket size and overall strategy. An investment that may be attractive to a certain VC might not be to another. To maximize chances to get invested, startups should map the VCs they have access to and see which one(s) meet their investment criteria. Although this does not guarantee a 100% investment, the chances will increase significantly thanks to the better fit.
- VC Funding is a competition-Fiction: This goes to both the VC and startups; VC funds always look for the best investments that align with their strategy and most exciting startups, if more than one startup qualifies, it is very probable that a VC will invest in them. As such, startups should not consider raising VC funds as a competition; a startup getting VC funding will not affect the chances of another startup being funded. A startup getting VC funding should not think about fundraising as a race; good startups will always attract the attention of investors.
- VC Funds are sworn enemies-Faction: Although in rare cases VC funds might start a bidding war on a certain company; it is more likely however that they collaborate on many cases and co-invest. Co-investment has been a rising trend particularly in the MENA region, as it allows for VCs to pool a bigger overall round for the founders, get validation from multiple independent sources, mitigate risk and also most importantly give startups access to bigger network.
- VC Funds look out for their interest only-Fiction: Let’s be clear on this one, VC firms are for-profit companies and are looking for the best return on investment from their portfolio. This is often wrongly considered self-interest. The reality is much simpler; VCs and entrepreneurs are shareholders in the same company making them defacto partners; the success of a startup becomes the success of all shareholders; making the interests of investors and VC funds aligned.
- VC Funds contribute only with their money-Faction: The main role of a VC fund is to provide growth capital for a startup; no ambiguity in this. However, many VCs also act as advisors and mentors to their startups. While the level of involvement and depth given by a VC depends on the startups’ needs, some startups get in-depth support in certain areas such as strategy, marketing, HR, etc. VC team members or advisors will often commit significant time helping a portfolio company. Other kinds of support may include introductions and links to other investors or even service providers.
- You cannot reapply to a VC Fund-Fiction: Many startups don’t apply for VC funding fearing they will be rejected and lose the opportunity; and often postpone scheduling meetings with VCs. Most VCs will meet again with startups they had originally rejected specially if the first impression or business model had been good; this possibly leads to the same VC investing in that formerly-rejected startup. However, for this to happen a startup must have either made a huge leap in terms of traction, KPIs, product or might have changed/adjusted its business model becoming more attractive for an investment. A startup having understood the reasons for its first rejection and fixed them should have no problem in scheduling follow up meetings with previously contacted VCs.
- VCs only care about strong teams-Fiction: The strength of a team is a major factor for a VC investing in a startup, a good team can execute its strategy, grow the company and most importantly adjust and pivot when the market assumptions change. However, no matter the team’s strength, a strong business plan and/or strong/innovative products are just as important.
- The closest analogy of the relationship between a VC and a startup is dating-Fact: This might sound funny but when you think about it: you start with the players getting to know each other and checking for attraction, then follows the investment which is close to getting married, while an exit is akin to a separation. And like any relationship, ups and downs happen but if the partnership is strong, it remains and grows.
- VCs will only give you the amount you need or request- Faction: One of the biggest misconceptions of fundraising is that the less you ask from VCs the higher the likelihood of receiving funding. While some VCs will stick to the amount asked others might propose a slightly bigger ticket (ie to cover 24 months instead of the 18 Months budgeted). This is a deliberate proposal to account for probable delays in execution and market factors and will give entrepreneurs more time to focus on the business component rather than on a perpetual fund raising cycle every 6 months.