Is the VC money for me?

Getting a “No” from a VC fund hurts, but it doesn’t mean that your idea or business is bad. In the article, you will find conclusions on the topic from my foregoing cooperation with start-ups.

Fund maker potential
Every founder has big dreams, which are like fuel on the road to success. Dreams are good, but the reality is more important when you approach an early-stage VC for funding. Ask yourself a few crucial questions before you make that step, for example: how much your business can grow? If it is 5x — congratulations, it will probably be a sustainable lifetime business for you, nevertheless, it might not be what VCs are looking for. Venture funds, however, are not the only option to get early-stage financing. Now, when the market is getting more and more mature, there is a number of private investors that might be willing to invest into less risky ventures being fully satisfied with the returns you can offer them.

While looking for an investment target VC funds always choose these with a chance to become a fund maker — a company that returns an entire fund. It means that VC investment not only enables rapid growth, but it also needs rapid growth. The expectation is for an early-stage start-up to grow after the investment at least 2x annually. There is something called a perfect growth path for a fund maker company. It comes down to “3x, 3x, 2x, 2x”, referring to a company’s annual growth year over year. Taking into consideration that the average start-up has around 7-year time frame from the first VC investment to exit, it gives the founder a pretty good picture of the pace on which the growth scenario should happen.

Clear VC fundraising path
What we see very often is that start-up considers its first VC investment as the ultimate success. Yes! It definitely means that a venture firm believes in your team and sees a big potential in your company. You have to realize though, that initial VC investment is only the beginning of a fundraising path, which will give you the necessary capital to reach certain KPIs and lead to the next VC round within 12–24 months. Work hard, keep your focus and with a bit of luck and favourable market behaviours, you will repeat this cycle 3–5 times and reach a level of growth that allows everyone to exit the investment with a smile on the face.

We don’t need another one-man show
Nobody knows or can do everything. We don’t even expect that. One person can do a lot in the early stages of a new project, but will have a really hard time to keep up with the demand of fast-growing business. Wise founders have to consider the importance of complementary competences, be ready to create a strong team and recruit people better than themselves at certain functions. Great CEOs know their circle of competence and listen to their senior team members. Even if you are not there yet, show that you are aware of that fact.

Check VC’s investment strategy
I can’t count how many times I have seen start-up teams who presented their project only to learn it was totally mismatched with the investment strategy of a fund they were approaching. Instead of wasting your time by sending your pitch decks all around the market, make research first. Each VC fund has its specialization. You can usually get to know it on fund’s website or by looking at their portfolio. There are several types of specialization among funds ((i) specific sector or business model, (ii) geographical focus and (iii) company stage (pre-seed, seed, Series A, etc)) and depending on what kind of business you are running, you have the biggest chance of getting an investment with the best fitting. The deeper you go into the specialization, the better outcome you may get. If your business is, for example, a marketplace, most likely a venture firm that invested in a vast number of marketplaces will understand mechanisms determining your business better, will have deeper knowledge and tools, and become a better partner in a joint venture (partner in crime. It is because VC funds offer not only money but also knowledge, experience, and network, thus the best results come when VC invests and backs only start-ups that are within the scope of its specialization.

Potential conflict of interest
The primary goal of each fund is to back the start-ups with the biggest potential and help them become global or regional leaders. Entering our portfolio, a start-up becomes a member of our family. We are opening our network and connecting with people and partners that we believe may have a positive impact on the start-up, we also constantly look for synergies between companies in our portfolio and with our network. As a result, I can’t imagine how VC fund would invest, support and build value in two competing companies at the same time. It would be an obvious conflict of interest.

Reference checks
There are dozens of various venture funds on the market, very often this are the first time funds, which basically means people standing behind the fund are either new on the VC market or running the VC fund for the first time. Doing the reference check is imperative. You have to understand who you’re taking money from because most likely you will be in this journey together with them for a relatively long period of time. It is extremely important for two reasons. First of all, there has to be chemistry between the fund and the founder, there is also a great need for the transparency and understanding of each other motives and DNA because when things go bad, and believe me when you running a business in so dynamic environment at some point things, even temporary, always may go bad you should know what you can expect from your investor. Be sure to make a few calls and talk to investor’s portfolio companies — you will get an insight knowledge on how the cooperation looks like. Secondly, you need to understand that accepting a VC firm with a poor reputation on the market may have serious consequences for further financing as difficult VC fund may not be a good partner, among others for the reason indicated in the first point.