Picking a Partner: The Value of a VC

Previously in our Navigating VC Series, Freddie Kalfayan discussed the 7 key steps of the deal process. In this post CEO of Smedvig Capital, Johnny Hewett, shares insight into how to think about the luxurious position of having multiple termsheets and the criteria for picking your new partner.

So it’s happened, all that work outside your already busy day job to help VCs get through the 7 or otherwise key steps has been productive and you are in the fortunate position of having multiple parties keen to invest. You have a number of termsheets in your inbox and a similar number of VCs proclaiming undying love. How do you choose?

Clearly, there may be fundamental elements of the terms themselves that exclude certain parties from the contest but this post is mainly focussed on how to think through choosing between VCs, assuming that their terms are in an acceptable band. However, a quick word on the terms themselves:

You can negotiate. The initial termsheet is not always the final word, especially if you have a competitive process, but decide what is important to you. Of course, headline valuation is important but is hard to negotiate on everything and come through it building a relationship positively. So, if the round size, board composition, instrument or other factor matter most to you, consider which battles you want to fight. Often, it is not the few percent of ownership that will make the difference but more likely other things and almost certainly who you choose as your partner. They have done their preliminary diligence on you, now is your turn to do diligence on them and it’s important. Some of that is about the attributes of the firm and some is about the actual individuals you will be working with.

It starts with basic chemistry. You will likely already have a good sense of this from the early meetings but if you don’t feel you have a very good idea of that, ask for more time and ideally in an out of a work context. It may sound obvious but be sure you know exactly which individuals you will be working with. You could easily be working together for 10 years so those individuals being people you look forward to spending time with is essential; if you don’t, it should be a ‘no’ whatever else is true.

If a firm is still in the race after the above, it is time to understand more about their attributes and capabilities. Don’t be afraid to push hard to understand what those individuals and their firm stands for. Good VCs will respect that investigation; indeed it would worry them if a team they are considering backing are not diligent about their enquiries.

Start with the basics if you are not already familiar with them including size of the fund, capacity, target hold periods, size of portfolio and track record. For your deal lead, how long have they been in the role, how many deals have they lead, how many other companies do they oversee, etc. You also need to understand their process from getting from termsheet to signed deal. This helps with understanding certainty of closing and also tells you a lot about the firm you are dealing with; a more thorough commercial diligence process may be harder work for you but it speaks to the depth of understanding they are seeking, which may be a good signal as to their capacity to be insightful as investors.

Next, seek to understand how they typically interact with portfolio companies, how frequently and at what level. What elements of the business do they expect to be involved in? VCs have very different operating styles and so do entrepreneurs. Some VCs expect to be a resource for many operational elements of the business providing help on strategy, pricing, prioritisation of markets, etc. Others view their role as more removed board advisers providing advice and introductions but little hands on support. There is no right or wrong but the intensity of interaction can vary greatly so it is important to understand what different players provide. Of course, it is also important to have decided how much involvement you want! Different entrepreneurs have very different views. Again, there is no right or wrong but it is critical before deciding on your partner to have established your preferred model.

Perhaps the most important element of diligence is referencing. This can be time consuming but is essential. You should talk to a number of other portfolio executives, who know the firm well, about their experience both of the firm and the relevant individuals. Are they open and honest? Do they provide the support you are looking for? How available are they when needed? Are they long term in perspective? Try to seek references from a mixture of successes and more challenged investments; are they fair when things don’t go according to plan? Do they have the financial resources to follow on if needed? Few will know a VC better than portfolio SMTs.

In summary, multiple offers of VC financing is definitely in the ‘high quality problem’ category but selecting the correct partner for you is nonetheless a vitally important decision. It will quite possibly affect the success of your business and quite certainly will affect how pleasurable the journey is. So be wary of focussing too much on terms alone and invest the time in detailed diligence of your possible partners. All VCs are definitely not created equal and finding the firm with the best capability and philosophical fit is critical; just make sure you find it embodied in individuals you want to spend the next 5–10 years with.

In our next piece ‘Decoding Diligence’ we break down the diligence process looking at the key components, timelines and sharing insight and tips for getting a deal over the line.