How To Tell Truly What Your VC Is Like?
You are doing your research before engaging with a VC. Or are signing a term sheet but want further clarity on how the investor will truly work with you. Whichever the case there is plenty you can tell about a VC from just public data, beyond the hearsay in the ecosystem. This post will try to illuminate many of the incentives that your VC might have.
1) Size of Fund — An obvious one — large funds tend to do large deals, medium ones medium, small ones small. But the trick is when you have a large fund coming into your seed or a small fund trying to squeeze into your B or C. In the first case, figure out whether the large fund is investing from a separate vehicle that’s optimized for earlier stage deals. Don’t sign up unknowingly for a brand name on your cap table that won’t do much for you because you are such a small part of their portfolio. And what you definitely want to avoid is they don’t do their prorata in the next round and becomes a negative signal for other investors. The second case, of a small fund coming on a later round, is rarer but you can do it as a favor if you have an existing relationship or if the the specific expertise the small fund is bringing is worth your while.
2) Number of Deals — A large fund doesn’t necessarily mean more deals and vice versa. For instance, a consumer focused seed fund should place many small bets and being ready to double down given the erratic dynamics of the space. Number of deals is really a proxy for how much time the partner will spend with you. A typical VC can really handle 7–9 boards, if your prospective investor is committed beyond that then calibrate your expectations accordingly.
3) Size of Deals — In general the relative size of the deal matters more than the absolute for an investor. Instead of looking at the actual check size ask them what typical ownership they look for and adjust accordingly for lead versus follow funds. A lead fund is typically financially motivated and looking to maximize its ownership while reducing the risk by sharing the equity with other investors. A follow fund can be financially motivated but is also where the vast majority of strategics play, which is focused on investing up to a certain threshold either because of the dry power available to them or corporate mandate.
4) Exits — A partner with good exits carries more weight in his / her partnership, period. Not just dollar amount of an exit but actual returns, which you may not know but can guess by looking at what stage the partner invested in the startup. Coming into a seed for a company that gets sold for $1B is very different than coming in at the last round, even if the public tagline around the exit that you hear is the same. It’s sometimes better to work with someone new to a partnership or earlier in their career since they will be hungrier and if you sense a strong working relationship. But be sure to decipher the politics of decision-making in the firm as much as possible to ascertain how much real power the partner has.
5) Networks — Look up the funds that are coinvested with the firm and the partner, it’s often an indication of where they have good relationships. Which can be helpful to you in syndicating the current or future rounds. Same for networks they belong to, for instance the schools and the companies they were at previous. You can’t overlook the secondary and tertiary effects of a fund’s access and reputation, it does matter for hiring, BD, sales and when articulating exits.
6) Operational Involvement — There is a widespread belief that ex-entrepreneurs make the best VC’s but it’s important to differentiate the skillsets offered by good operators and good investors. In a Board setting, investors who were previously entrepreneurs might be biased by what worked and what didn’t in their past and try to domineer the company in a direction different from the founders’ vision. That said, having good operators on an investment team in general does provide invaluable industry contacts, resources, and an extra dose of compassion. This is especially valuable for early-stage companies. Good investors empower entrepreneurs with their networks, wisdom, and advice but ultimately let the founding teams steer the business.
This is a collaboration with Cindy Na. These are purposely short articles focused on practical insights (I call it gl;dr — good length; did read). I would be stoked if they get people interested enough in a topic to explore in further depth. I work for Samsung’s innovation unit called NEXT, focused on early-stage venture investments in software and services in deep tech, and all opinions expressed here are my own.