Choosing the Right VC is More Important Than Any Hire You'll Ever Make

Puretech Ventures' David Steinberg talks about building a successful partnership with a VC firm.

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When is the right time to look for venture capital, and how do you find the right VC firm to partner with? These days, more and more growth company CEOs and entrepreneurs are asking us about sources of growth capital. We thought it would be useful to talk to those with significant experience in raising venture capital.

To get one perspective, Karl Stark spoke recently with David Steinberg, a partner at PureTech Ventures regarding the current state of venture capital and how entrepreneurs should approach a partnership with venture capital funds.

PureTech is an "institutional founder," which means it conceptualizes, incubates and founds companies, and it focuses exclusively in the life sciences arena. PureTech builds a company from scratch with its own seed capital and sweat equity, then either collaborates with strategic partners or works with venture capital firms once the business achieves proof of concept and is ready for significant investment to move to the next stage of its growth.

Steinberg has served as founding CEO and board member of portfolio companies Enlight Biosciences, Endra, Vedanta Biosciences, Entrega Biosciences, and Knode. He also served as chief business officer of portfolio company Follica, and VP of operations for portfolio company Satori Pharmaceuticals.

Here what Steinberg had to say:

As an entrepreneur, when do you look for funding from angel investors vs. larger VCs?
If all you need is $150,000 to $200,000, you should really look to cobble that together through angel investors, or your rich friends. Depending on your industry, you can also potentially get grants, such as the Small Business Innovation Grant (SBIR), or an SBA loan. Your goal should be to raise as little as possible to put together a proof of concept before you go to a larger investor such as a traditional VC. This approach makes it more likely you'll succeed in fundraising and increases your valuation if you do.

Which VCs should a growth company CEO be looking at? Why should they look to partner with one VC vs. another?
There are probably 10-15 blue-chip VCs in the U.S. that do the majority of biotech deals in terms of total dollars. These are funds like NEA, Polaris, Third Rock, Atlas, and others. Then there are smaller funds as well that focus in specific areas. There tend to be differences based on geography--it's obviously easier to work with a VC that's in your neighborhood, but most of the big VCs are in Silicon Valley, Boston, or New York.

It's most important to find a good match of people and a fund that has experience working with companies like yours. Personality match is very important because the VC is going to be active in your business, especially if things don't go exactly as planned. In many cases choosing a VC is going to affect your business more than someone you hire. Their network and experience could make or break the company.

The life of the fund is also very important. You want to be sure that the time horizon of your company matches the lifecycle of the fund, or you may be in a situation where the VC is under pressure to exit or force you to move quicker, for example, or doesn't have sufficient capital in reserve for follow-on funding.

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From talking with Steinberg, it's clear that venture capital is something you should seek for a specific reason, and only if you can state a very clear case as to why the benefits outweigh the risks. There are significant trade-offs when raising venture capital, and if the capital is not necessary, entrepreneurs are often better off without it.

Share your thoughts on venture capital partnerships with us at karlandbill@avondalestrategicpartners.com.

Karl Stark and Bill Stewart are managing directors and co-founders of Avondale, a strategic advisory firm focused on growing companies. Avondale, based in Chicago, is a high-growth company itself and is a two-time Inc. 500 honoree. @karlstark