One of the most important decisions of any entrepreneur is where to get your capital. Investors are typically locked to your company until it sells or goes public. The relationship is often compared to a spousal one due to its permanence. And finding the capital to grow your company can be very difficult. From my experience raising money for my startup QuotaDeck and from talking to stellar investors, I wanted to share some of what I have learned.
So here are 5 of the most important things to consider as you start raising capital for your startup:
- Geography--most Venture Capitalists (VC's) have a defined geography that they told their investors they would operate in, and they are pretty well bound to that. The argument goes that they can only be prominent in so many geographies based on their resources, so they should focus their energy there. So look for VC's that have invested in other startups in your geography to make the best use of your time.
- Sector--similarly, most VC's promised their investors that they would invest in a particular thesis. The thesis defines sectors which the VC Partners have a depth of knowledge and experience in, so that they are more qualified than most VC's in that area. At least the argument goes. So again, look for investors that have invested in your sector or something similar previously.
- Conflict--most VC's will not invest in startups that conflict with companies that they have already invested in. So don't waste your time trying to pitch these VC's and don't use your few precious favors trying to get introductions to these VC's. Save it for the others. Go look up the investors for all the competitors in your deck, and just forget about them. You don't want to send them your data anyway, as stories of unscrupulous VC's forwarding your deck to the competitor abound.
- Birds vs Turtles - The linked article was written by Subtraction Capital and explain how "The Bird" funds will be very involved with actively helping the startups they invest in, like a mama bird. Their partners may even be successful operators that are going to spend more time with the companies they invested in than "sourcing new deals." Turtle funds, in contrast, typically make more investments and see which survive. They may invest in so many companies that it would be impossible for them to spend much time helping any single one, or they may believe that the most impactful help they can provide is adding the capital and associating your company name with their brand. So if you want more involvement, select a Bird VC, but if you will feel encumbered by a hands-on investor, select a Turtle.
- Fund & Check Size--VC's also promised their investors a certain "portfolio construction." This defines how many investments they will make, how large the investment is, and often even the valuation range of the companies they will invest in. It usually is not worth your time chasing a VC that only does B and later rounds if you are trying to put together your Seed round, and vice versa. There are VC's that do only Seed, only alongside a short list of other firms, only A, only B, B or later, A or later, A or B, you name it.
An entrepreneur can look at resources like Crunchbase, Angel List, PitchBook, and CB Insights to try to help identify the right VC's and rule out the wrong ones.
Remember that Venture Funding is always a supply-constrained market. In good times or bad, there are always more entrepreneurs that want capital than there is capital available to fund them all. So you are going to have to compete and win your capital in this market. Hopefully using this short list of parameters to focus your effort will increase your chances of success.