Ventures What? Working With A Lesser Known VC
Working with well-known VCs has obvious advantages. The luster of the brand, which can help in hiring and marketing. A larger network which can be the difference in getting that right intro. Even a good exit can be facilitated hugely by an experienced investor who has the credibility among the bankers and the acquirers.
But what if you are getting a term sheet from a lesser known VC? Here are three practical principles to keep in mind.
1) Expertise
There are two kinds of expertise at play — VC and domain knowhow.
The VC part is about how much the investors understand about their trade and how they will be able to guide you when the company faces a particular situation (they always come up). Beyond just conversations, look into the investments the VC has made, their previous background, do reference checks especially if it’s the lead investor. For the latter, don’t ask just someone who has pitched to the VC or knows them reputationally, if you want meaningful answers ask really an entrepreneur who has been funded by the VC about his / her strengths and weaknesses.
For the domain expertise you can give them bonus points for having worked or looked previously in the space. But I would argue the level of diligence they do is the strongest signal of how much work the VC will do to support and even challenge you. It’s easy to fall under the trap of equating valuation with value, the best VCs may give you a lower term sheet but deliver far more.
2) Working Relationship
Hiring and firing employees is hard on multiple levels, hiring and firing your investor is harder. Remember that an investor is a co-owner with you and likewise has rights and responsibilities towards the company including governance. If you ever eavesdrop into a VC partnership meeting you will hear investors talk not just numbers but much meta — using the diligence as a proxy for what it will be like working with the entrepreneur.
VCs actually share many of the same traits of an entrepreneur in being driven and capable, which actually increases the odds of conflicts. So figure out whether your potential investor will truly give you enough guidance but also enough room to be captain of the ship. Similar to most human relationships it’s obviously hard to know until you have had multiple interactions, sometimes years in a boardroom. So make the diligence two-ways and ask your VC questions too, even the very simple “what are best practices about a startup working with you.”
3) Ecosystem Footprint
A VC who is younger, or working in a newer firm, or is understated as a Principal will likely be lesser known. They are also more likely to be more responsive and attentive to you. And that investor may be the strongest conduit into your future ones. I see it as an exercise similar to doing cashflow valuations. You can’t just look at this quarter — you really need to do an NPV of the investor’s value. As a practical principle look at what other firms this VC has invested with and whether his / her follow-on rounds are led by other investors you respect. Some firms will advertise boldly they are investors in so and so startup, dig deeper into how and when they got in. Their investment could have been a very small amount, at a later stage, through a secondary transaction, or through an acquisition. None of which is a negative, but it’s important to understand that the logo on a website is not the full story.
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.
