Startup Fundraising Guide: How to Choose the Right Venture Capital Investors to Work With

 By Martin Luenendonk| 2017-07-24T22:36:12+00:00 July 14th, 2017|

Your startup needs money and VCs can provide it.

Choosing the right VC to work with is then an easy pick, right? Just go with the one that gives you the money!

Well, not quite.

For many, the question of finding a VC seems as simple as that.

But VCs don’t just hand you a pile of cash and let you play with it.

More often than not, they want a seat at the board of directors and they’ll be closely watching your startup’s performance.

If you’re doing bad, it’s probably the VC who will be the first to give you a hard time about it.

Therefore, you really don’t want to just pick a VC who gives you the most money. You need the right VC for your startup needs.

But how?

In this post, I’ll show you the two key elements in choosing a VC to work with: matching VCs with your fundraising status and finding someone to partner with.

I’ll also give you a few other puzzle pieces that are useful to keep in mind.

So let’s get started!

Investor readiness checklist

Match VCs with your startup fundraising stage (and why this matters the most)

Startups go through a journey in terms of fundraising and valuation.

This is an important thing to understand because you need to match your startup’s fundraising status with the right kind of VC.

What does this mean?

You need to know your startup’s fundraising needs and the stage you are in during your journey.

Essentially, you need to identify how much and for what you need the capital?

If you’re just starting out and you just have an MVP, you’ll need seed funding. You need money to launch your product.

On the other hand, perhaps you’ve already launched, but you know that with additional investment you can roll out the product or service wider.

Perhaps you’re thinking of launching another product to support your growth. At these later fundraising rounds, your needs for the capital and VC expertise will be different.

Why?

First off, you need to understand your needs before you strike an investment deal.

I’ve previously told you (in my post about pitching) how finding the right VC is a bit like dating. Striking a deal with an investor is, therefore, a bit like getting married.

Well, except that getting divorced is much easier than changing a VC. While some divorces can get costly, you’ll definitely end up on the losing side if you wanted to kick a VC out of the relationship.

But there are other practical reasons for matching the investor with your fundraising status.

As you saw above, your startup needs funding for different things – the purpose of raising funds will change.

In the investment world, certain VCs specialise in catering for these different needs.

This is partly explained by the different risk assessments and knowledge of the VC.

For example, investing in a seed stage startup is always riskier than investing in Series C round (seed startups don’t have much proof of actual growth or performance yet, for example).

It’s imperative to match your fundraising needs with a VC who has the right experience and knowledge to support those needs.

Venture capital investors who always invest in later-stage startups won’t necessarily have the right experience to guide you through seed-stage.

Furthermore, VCs have an ideal timeframe for their investment. Long-term investors might be willing to wait over eight years before getting the investment back, while short-term VCs want a return and exit within five years.

You need to ensure you match the VC’s needs with your own needs – are you looking for a short- or long-term investment.

Essentially, the above boils down to time.

There is no reason to waste your time pitching to VCs that invest short-term in late-stage startup if this isn’t what your ideal fundraising situation is.

There’s one more thing you need to consider in terms of matching your startup with the right VC and that is the question of a lead investor.

Your fundraising chances will increase a great deal if you have a lead VC.

They can help open more doors for you and a good lead will give an extra boost for other VCs to invest. When they see someone is already on board, the other VCs will follow – investors are a bit like herd animals.

Another way of thinking the above is to know investors have specific profiles.

Indeed, Subtraction Capital’s Paul Willard has divided investors to Turtles and Birds:

Birds

Turtles

Small number of large investments in different sectors

Provide support and help for the few startups to grow

Individual support and focus on creating success

Create a safe support structure around a high number of startups

Invest in a number of startups and allow them to grow individually on their own

Startups need to find their own way to growth and success

Now, it isn’t that either of these VC-types is necessarily better than the other.

The whole point here is to understand how your fundraising and startup needs need to match those of the investor profile.

You might be at the start of your journey and therefore, you’ll benefit having a ‘bird’. On the other hand, perhaps you don’t want the investor to meddle with your things a lot and you just want to have a ‘turtle’ to provide you with the capital.

Pitch Deck Course

How to match your VCs with fundraising status?

Well, first you need to identify your fundraising needs. Not just in terms of how much money you need, but what other requirements you might have (long- vs. short-term, bird vs. turtle, for example)

Knowing your own fundraising needs is perhaps the easier part.

Once you know this, you need to start looking for the right VC match to match those fundraising needs. To do this, you need to:

  • Check VC profiles online (fund websites, Crunchbase, and LinkedIn profiles) and find an answer to the following questions:
    • What is the typical investment (amount)?
    • What kind of investment opportunities is the VC looking for (the kind of sectors, startup types and so on)?
    • What is the past experience and portfolio type (the industries and investment types)?
    • Is the VC interested in follow-up rounds?
  • Find the above information by talking to previous or current startups the investor has invested in.
  • Check with your networks in the sector to see if they know something about the specific VC.

Stop looking for a chequebook and try to find yourself a partner

As I mentioned above, finding a VC is sort of like finding a spouse.

What this means is that you’re not just looking for a chequebook handing you money. The investment deal will also add another voice to the business – you want to find a ‘partner in crime’, someone who will give you both support and tough love when needed.

As well as matching the VC with your startup fundraising needs, you also need to ensure you find a venture capitalist who is on your side and who can provide you more than just money.

How do you guarantee this?

Don’t just stare at the figures (past investment record)

First, it’s important not to focus purely on the investment record (i.e. the amount of investments they’ve made and the returns they’ve attracted).

This doesn’t tell the full story of what type of investor the VC is.

Instead, you want to talk to entrepreneurs the VC has invested in the past. You want to find information like:

  • How did the VC behave and act? Were they nice, pushy, able to listen, strong-minded and so on?
  • What was the VC’s input in running the business? Did they provide support, information, contacts and so on? Were they hands-on, did they want to read all the paperwork or did they allow you to perform in peace?
  • What are the strengths and weaknesses of the VC?

This gives you a better idea of how the investor will be involved with your business and the decision-making process.

It also reveals more about the kind of person you would be dealing with, allowing you to check if your personality matches the VC’s character.

Get together – meet face to face and look for a ‘believer’

You don’t want to just read about the VC and talk about a possible investment over the phone or in e-mails.

Research has shown how we make judgements – and rather accurate ones – through first impressions. It’s important you get the see the VC in person because it provides you with a much deeper picture of what the person is like.

You’ll most likely get an immediate vibe, whether you’d like to work with the VC or not.

Furthermore, meeting in person will help you read body language and this will give you a better idea of what the VC actually thinks of your startup.

Your startup is your baby and you’d do anything to succeed.

While VCs, of course, want to ensure your business succeeds (they, after all, want their investment back with around 10x return), you don’t want them just to be excited about the numbers.

Having an investor on board who’s actually passionate about your product will help you achieve success quicker.

Why?

Because they will understand your vision and how to best get there. Thy will understand what you are building and don’t just think what are the quickest ways to make a return.

Focus on their advisory role

Above all, the investor will play an advisory role – after all, they will sit on the board of directors.

You want to understand what types of advice you want and what kind of advisor the investor is.

Tech entrepreneur Jyoti Bansal has written there are two types of advisors. An investor can be either a hard or a soft advisor:

Soft Advisor

Hard Advisor

Gives advice, but trusts you to do the right thing in the end. Gives advice and prefers if you follow the advice directly, might give you a really hard time if you refuse.

Of course, you need to also validate the expertise of the VC, especially in terms of advising a startup.

Are you going to deal with a pure VC? What I mean by this is the type of investor who has a background in investments and money in general. The investors who’ve been involved with the money side of the business from the start of their careers.

The other type of investor is the CEO investor. These are VC who started as an entrepreneur, perhaps launching their own startups. They made their mark like this and then began providing their expertise to the next generation of entrepreneurs.

The second type suits many startups, but especially those doing this the first time. Those that don’t just want advice on how to make the most with finances, but who like to learn the ropes of running a business.

Higher startup valuation checklist

Don’t just pick a firm but know the partner you’ll be dealing with

A big part of VCs operate under a bigger fund.

Indeed, you’ll most likely identify interesting VC funds you want to approach for investment.

If this is the case, you need to make sure you know whom you will be dealing with after the investment deals is done. A lot of the times, the person(s) you pitched might not be the people you’ll deal with on a day-to-day basis.

For the above reasons, it’s important you know exactly who’ll be dealing with your startup before you sign the deal. Make sure you meet them and get to know their personality as well – you don’t want to end up with someone you can’t trust and respect.

How to choose VCs

The bottom line

The point I’ve tried to get across here is that you can’t just focus on the size of the investment.

You need to get along with the VC because you’ll be dealing with them long after the money has made it to your bank account.

You’re essentially marrying them until the ‘divorce’ happens and they get their return.

VCs must be good people. As Mark Suster, entrepreneur and VC, has written, you don’t want to pick a ‘seagull’ investor who will “swoop in for one day to “check in on things,” shit on you and then fly away”.

This, of course, doesn’t mean they need to worship you and agree with everything you say and do.

However, it means that the feedback and support you get is constructive and honest. You need to be able to communicate, compromise and change each other’s mind when it is needed.

So, what are the qualities of a good VC? You want someone who is:

  • Calm, honest, upfront, respectful and friendly.
  • A person with a good EQ.

The remaining puzzle pieces to choosing the right venture capital investors to work with

Now, the above two points are really at the core of selecting your VCs.

They focus on the main points: finding an investor for your startup needs and ensuring you build the relationship on mutual trust and respect.

However, you should keep a few other things in mind.

In essence, these are the more practical aspects of finding the right VCs to work with. The remaining puzzle pieces are:

  • Geographical location. You want to find a VC relatively close to where your startup operates. This is because it makes meeting up easier, both during the negotiating phase as well as when the VC joins the board. Depending on your startup, local knowledge might also come handy as you try to build up the business.
  • Conflict of interest. It’s definitely a good idea to check the investor’s portfolio and see if there are potential conflict of interest issues. You don’t want to waste time chasing an investor who might not be able to invest anyway. Clear this as hurdle as soon as possible. Typically, an investor would let you know immediately after contact whether potential conflict of interest exists so it’s always a good idea to check with them if you are unsure.
  • Quick decision-making. You want your VC to make decisions relatively quickly. You don’t want to spend a year going back and forth with the VC. If they keep delaying the pitch meeting, then you might want to start focusing more on other, more interested VCs.
  • Networking opportunities. Of course, you should also keep in mind what kind of networking opportunities the VCs you contact might be able to offer. You’d ideally want an investor who can open doors and introduce you to important players within the sector. Therefore, their previous and current investment portfolio is something you want to keep an eye on when selecting the VC.

Once you’ve focused on the first two key elements, you want to also check the above pointers before you make contact with potential VCs.

Choose an investor you can work with, not someone who causes you extra work

Venture capital investors are not just cash cows you use for money.

At best, VCs are a coach for your startup – someone who can provide the capital but also other resources and expertise to help you grow.

Even if you wanted to just get the money, you often don’t get this with a VC.

VCs want to be involved – they will want to be relatively hands on and understand what decisions you are making, how you are making them, and why. At minimum, they will want a seat on the board of directors.

Therefore, you need a VC who isn’t just willing to give you the capital you need.

You want a VC who matches with your fundraising AND startup needs.

Someone who understands the situation your startup is in. Someone who will be able to provide you with constructive feedback on the performance and therefore, help you make better decisions.

Wouldn’t you rather want someone who cares about how you’ll do then someone who is just out there for themselves?

Since the above requires close cooperation, building a good partnership is essential.

You need the VC to match your personality, as well as the startup needs.

This will guarantee fruitful relationship for the future.

What would you add to the list?

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