Insider Info on How VCs Approach Series A Investments

On Friday, January 6, at CES, we hosted a conversation with a panel of venture capital investors to understand how they approach Series A investing. Participants in the conversation included:

• Hamet Watt, Board Partner, Upfront Ventures
• Jenny Fielding, Managing Director, Techstars
• Jon Goldman, Venture Partner, Greycroft Venture Partners
• Nicole Quinn, Partner, Lightspeed Venture Partners
• Ryan McIntyre, Managing Director, Foundry Group

If you want to dive deep into the conversation, you can view it in its entirety on our Periscope feed. There are tons of great nuggets of wisdom and unique perspectives offered by each of our panelists. For those with less time on their hands (after all, we’re building companies here!), here is a summary of some of the topics we discussed:

Each VC Approaches Investments Differently

Each of the investors talked about their investment theses for how they approach investments at key stages such as first money in, seed, series A and later stage investments. They each had a bit of a different approach in terms of target ownership amount, range of investment size, desire to hold a board seat or not, industry/sector focus, and geographies in which they consider investing.

Do Your Homework Before Approaching Investors

Given how differently each fund and even each individual investor within a fund approaches each of the above items, it is critical that founders do their homework on each investor they may wish to approach before attempting to do so.

Entrepreneurs can do this homework in any number of ways from finding articles or interviews from investors (including things like watching this panel!), following them on social media and paying attention to what they post, pattern matching against past investments, and getting feedback from other entrepreneurs who may have worked with them in the past.

That Said, Exceptions Happen!

But given all of this, it is critically important to remember that in venture capital, each individual investor may have a set of general guidelines they use when making investments but almost every investor can cite instances where they’ve deviated from their guidelines in the past.

That said, the closer your company is to matching their sweet spot for an investment, the more likely it is that they’ll want to engage with you.

VCs Invest Time “Getting Smart” on New Markets

Investors spend considerable time themselves getting up to speed on emerging technologies, and often they are learning about these technologies roughly within the same general window or curve as entrepreneurs who are building businesses around them.

VCs do all sorts of things to dive deep on new technologies including reading articles, attending conferences, and (probably most importantly) trying to meet as many founders and companies as possible who are working on technologies that they want to know more about.

As a founder, keep this in mind, especially if you are working in an emerging area! There is nothing disingenuous about a VC meeting you as part of their learning curve, but one thing you can ask when meeting a VC is to understand how likely they are to make an investment in or around your technology focus or business focus in the near future regardless of whether or not it is in your company directly.

Referrals Drive Deal Flow

There are lots of services on the web now to help investors get smart about a space including Mattermark, Pitchbook, CB Insights, and more. Investors are more likely to use these in a diligence phase or to understand competition around an investment they are contemplating rather than using these for sourcing of new investments.

Investors source the vast majority of their new investments via referrals from other founders, other investors, and trusted members of their personal networks.

Pro tip: when trying to engage a specific investor, the stronger the referral you can get, the better chance you have of securing a real conversation with that investor.

And super pro tip: this is one reason why it’s always useful as founders to spend some time helping and being #givefirst with other founders… you never know when good karma can be helpful to you down the line… like when that entrepreneur you helped two years ago goes on to close a funding round with a top VC and is glad to help you with an intro in the future.

Syndication

VCs engage in what is called deal syndication, where once they know they want to invest in a deal they will often work to bring other investors in the deal that they think can be helpful to the company in the future and down the line as well.

Their approach to syndication can change on a deal by deal basis…on some deals an investor may want to take the bulk of the round in order to achieve a target ownership percentage of the round…in other deals they strategically may want to bring in a co-investor who they know can lead a later stage round in the future if necessary (typically a VC doesn’t intentionally seek to lead multiple rounds of investment in a company in a row as they want outside investors into the company in order to make sure that the company is fetching a market price with each new round). Various factors can change their approach on this such as whether the company is pre-revenue, pre-product, or in a less mature market.

Product Market Fit

VCs often talk about whether a company has achieved product market fit but this is a fairly subjective thing. Some investors may have key metrics they want to see a business achieving in terms of revenue or growth before deciding to invest…and again the maturity/immaturity of a market or technology may impact this as well. In general, this goes back to the above point that every investor likely has a set of theses they use to guide them but in the end the decision to invest or not is highly subjective.

Finally, one last point to consider is that venture capital investment is only one of many means you can use to grow your business. You can of course bootstrap by living within the means of the revenue you directly generate. If you are working on a new technology, there are often grants at your disposal such as NSF SBIR grant.

And there are debt instruments and other tools at your disposal (though a typical bank loan is usually not readily available to early stage startups due to lack of revenue and extreme unpredictability about the business itself). In general, figuring out how to finance your business is, like most things to do with startups, extremely hard and is much or more art than science.

Hopefully these tips and insights help make the journey just a little more accessible! And again, if you have time, check out the full conversation for more details and tips. Thanks again to Hamet, Jenny, Jon, Nicole, and Ryan for taking the time to share their thoughts!

This was originally published on the Techstars’ blog.

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