How to find true love in Venture Capital
A love guide for founders written by a VC investor
Getting a VC in your captable is like getting married. And, like marriage, for most people it should be a well-thought-out decision — you shouldn’t marry a stranger. Marriage (and investment) means commitment, for better and worse, ‘til death (or hopefully an IPO/exit in your case) do you part’. And whether it’s death or an IPO/exit that do you part will depend — to some extent — on having chosen the right investor for you as partner. So, before saying ‘Yes, I do’, make sure you and your future partner (VC investor) are aligned in your view of the world (and the vision for the business) and want the same things out of life (and your startup).
Really knowing a person (and investor) is not an easy task — we have all heard horror stories of people (and VCs) who turn up to be completely different to what they promised to be. I hope the tips below at least help you identify the key questions/boxes your future VC investor should tick, as a minimum.
First step: ask yourself — are VCs my type (of investor)?
Truth is that Venture Capital money is not for everybody — it’s not for every founder, it’s not for every business and it’s not for every market.
There are many other options to finance your startup: you can go for business angels, bank/venture debt, government grants, even bootstrap it with your own savings and/or business revenues. Venture Capital is just one of the many funding options. And not having VC money doesn’t say anything about a business and/or a founder, nor good nor bad. Like love, funding can take many shapes and forms, and there’s no perfect general solution that works for everybody. You just need to find the one that works for you. No judgement.
So, I always encourage entrepreneurs to understand very well how VCs work, their business model and the strategic and legal implications of their investment and decide if it’s the right form of funding for them. Here a few resources to help you get into a VC investor’s mind and decide whether we are your type or not.
- I’m biased here because Harry is family to me, but there’s no better and broader resource than his The Twenty Minute VC podcast to get an informed view of what VCs look for and expect from founders and startups. Also, my good friend Lola from Hummingbird recently put together a beautiful list of other newsletters and podcasts we listen to
- An investment, like a marriage, is a contract after all (hopeless romantic, I know) and Venture Deals is a must reading for founders to understand the key clauses of that contract and anticipate the legal implications of getting a VC in your captable.
- And if you want to learn how it all applies to us at Samaipata, here we collect and answer top 20 questions we get from founders
Second step: ask yourself — is it the right time, am I ready (for a VC)?
You might have decided you fancy VCs but committing is not only a question of attraction. There are other considerations to take into account, like timing and the life stage you (and your startup) are at.
Sometimes it happens that your startup is just too young for VC investment. Or you might not be not ready for ‘what’s mine is yours’ (c. 20% dilution is market standard) yet and believe that you can get better terms down the line. Whatever the reason, just make sure the time is right for your startup and that you are ready to get VC money.
Third step: start dating (meeting)…and kissing frogs till you find your prince/princess
Ok, you like Venture Capital and you are looking for something serious and lasting. What next? Well, you need to go out there and start dating, meeting as many VC funds/investors as possible to find your better half.
Let’s start by the bad news. Like in dating, in the Venture Capital world there are a few bad guys/mean girls, avoid those. Good news though, there are plenty of eligible good guys on the VC pond.
Bad news: not every (good) VC investor will be for you, sometimes it just isn’t a fit. You will kiss many frogs before you find your prince. Good news: there’s a prince out there for you. You just need to learn how to identify the frogs to save you time.
What’s important is to focus on those VCs where there’s a potential fit so as not to waste anybody’s time. Do your work to decide what investors to target, make sure to choose the relevant firms and partners by stage, by business model, by sector. Don’t do blasts, blast emails are not sexy. Follow-up, chase, but don’t stalk (there’s a fine line, I know).
(More) bad news: not every VC investor you like will fall in love with you, you will get rejected, many times. Good news: It’s fine. We all do get rejected sometimes, trust me, VCs know a thing or two about rejection by entrepreneurs. You just need to identify and read the “no” quickly and move on. Don’t do this very common thing we all do of clinging on to something that’s never going to happen. Let go, quickly (easier said than done, I know).
Throughout this process you will get conflicting feedback on your startup and your vision. It’s important that you take that feedback as learning opportunity from people (investors) with a lot of dating (meeting startups) experience but don’t go schizophrenic, stay true to yourself and your vision.
Fourth step: give your heart, but keep your head
You have found one VC you like and who seems to like you. Or many! Lucky you — no judgement, at this stage, the more the merrier. Great. Now keep your head cold and continue doing your DD.
Here some key questions you should be asking:
- Do you want to live (work) together?
Throughout the whole relationship building phase you should be constantly asking yourself that question.
There will be times you will whatsapp your VC investor more times than you whatsapp your mother (and this is a big statement coming from somebody with a Spanish mother). So, ask to go on dates outside the office (on the DD phase, I always take founders out for dinner and piscos) and make sure you commit to somebody you trust and enjoy working, communicating and spending time with.
- What do her/his people (founders, co-investors) say about him/her (and the fund)?
One of the big steps in a relationship is the moment you meet his/her friends. You can learn a lot about somebody by seeing her/him interact with her/his close circle. Same with VCs.
So, do your DD. Ask around. Speak to founders in their portfolio. Speak to co-investors. Reach out cold or ask for an intro, most VCs will be very happy to do so. But do your homework.
- How will she/he add value to my life (startup)?
It’s never a good idea to marry just for the money, you need to find a value adding partner that will make you a better person (founder).
So, don’t be afraid to ask the tough questions and don’t take any BS, every VC firm is founder friendly nowadays. Be specific, push, ask for examples/case studies. Does their strength lie at hiring/sourcing talent? Or is it that they have a very relevant network of potential clients for you? Do they help you with fundraising on future rounds? How did they specifically add value to company Y and Z?
The right VCs will respect you for asking the right questions, in this case nobody is gonna roll his/her eyes in a “here she/he goes again” way (yas!).
- Am I a priority in her/his life (portfolio)? Are they as invested in the relationship (business) as I am
This is a very important question and it’s not asked enough.
VCs are not monogamists, that’s not our model. You will be marrying into a portfolio. And in this case that’s ok, it’s actually great as there are many synergies between portfolio companies. But you need to make sure you are relevant for the fund in terms of ticket size (vs. their fund size and average ticket size). Otherwise their incentive to really add value (i.e. dedicate time and resources) and support you through the ups and downs won’t be there.
Sometimes super rich (sometimes hot, always older) VCs might fancy you and it can be hard to resist. But in some cases the right decision might be to play hard to get and make them wait until you and your startup are ready for them to invest a relevant ticket size. In dating language: if I’m Plan B, you are plan Bye.
- Will they always be by my side (and follow-on)?
When you pronounce your wedding vows, you commit to staying together ‘til death (or an IPO/exit) do you part, for better or worse. So, assuming your startup might need more funding in the future, it’s important to understand what’s a VC’s follow-on policy for next rounds.
This is important because of signalling on next rounds — unless the market is clear that that specific investor doesn’t do follow-ups (this happens), to have the lead investor of your previous round not following-on is gonna raise some eyebrows and make your life more difficult. Like a bad divorce.
Fifth Step: Happily ever after…now the real work starts
You have found a VC that ticks all the boxes above and the butterfly feeling is mutual. The VC gets down on one knee (shoots a termsheet), you agree on the prenup (the legals) and a few weeks later you finally tie the knot (close the deal)…then the real works starts. You, together, will need to build a family and raise a unicorn.
But before, let’s celebrate love! I wish you all a Happy Saint Valentine’s day filled with love (of any kind) and chocolate (in any shape or form).
