It's a great time to be an entrepreneur in America. According to the latest data from Pitchbook, U.S.-based companies have raised $66 billion in venture funding so far in 2019, putting the market on track to surpass $100B for the second year in a row.

But just because the startup world is awash in venture capital doesn't mean funding comes easy, especially for early-stage companies that have yet to reach product/market fit.

The Pitchbook report also shows that so-called "mega deals" -- VC rounds exceeding $100M -- are capturing the lion's share of the funding this year, with $36.5B landed. Angel and seed-stage rounds, meanwhile, are on the decline, accounting for a mere $2.1B through Q2 2019.

For founders of early-stage startups, this raises important questions about when to raise venture capital funding and how to pick the right investors. I asked some leading early-stage VCs for their perspective. Here's what they told me:

1. Money talks, but mentorship matters more.

According to John Vrionis, founding partner at Unusual Ventures -- perhaps best known for early investments in AppDynamics, Mulesoft, and Nicira -- the key is finding the right partner for your particular stage of growth.

In the early days, that means seed-stage investors with a track record of getting founders over the most challenging hurdles, typically recruiting engineers, sales development, and getting your narrative right.

"As a seed-stage founder, consider investors who will truly partner with you to navigate the key challenges of taking a great idea from conception to product-market fit -- the hardest part of the startup journey and when most companies fail. Help shouldn't be limited to advice or money. Look for investors who are willing to roll up their sleeves and work in the trenches alongside the founding team," he says.

Vrionis also advises founders to choose a venture capitalist who has empathy for the founder's journey and believes in their judgment. "The best venture capitalists are supportive and demanding. They will push founders to become the person and leader they were meant to be, and support them through the process and its inevitable ups and downs." 

2. Prepare for a 10-plus-year relationship.

Greg Sands, founder and managing partner at Costanoa Ventures and an investor in Alation, Intacct, and Quizlet, suggests founders raise money as soon as they can to attract the kind of financing partner one needs for a startup -- someone you want to work with for as long as a decade.

"You want to go with an investor that you trust, not just a firm your friends have heard of. That means determining whether your objectives and motivations for starting your business are consistent with the investor's," he says.

When vetting VCs, Sands encourages founders to ask other entrepreneurs about how the investor behaves when a company hits speed bumps -- because every business does.

"You're looking for a partner who helps your company achieve its full potential, which includes -- but is not limited to -- cheerleading. It's also about finding someone who will challenge, inspire, and provide the hard truth when you need to hear it."

3. Ask three key questions.

From the perspective of Jillian Williams, investment principal at Anthemis, whose investments include Matic, Kindur, and Rally Rd, there are three main questions entrepreneurs should ask themselves when they are considering raising capital:

First: How much more will I be able to do by getting outside capital? "If you don't think that VC money can help multiply your growth and do so in a shorter period than you would without it, the timing might not be right."

Second: Am I ready to give up 100 percent control of the company? "Raising VC money comes with strings attached, and while most VCs aim to help, you become accountable to someone other than just yourself."

Third: Is this investor the right partner for our long-term journey? "It's crucial for entrepreneurs to be very selective about who they are picking. The VC you work with at the seed stage will be with you for the next 7-10 years. Make sure you choose well."

4. Make an honest self-assessment.

Ask Seth Berman, partner at Susa Ventures and an early investor in Flexport, Periscope Data, and Robinhood, and he'll tell you most investors are willing to invest in pre-product companies when the founders have domain expertise building products to solve problems they have experienced firsthand at a previous job or company. "If you have the right experience and know-how, you can raise right away," he says.

If the founders do not have domain expertise, he recommends having a product built and traction showing product-market fit before raising VC funding. "This can be early traction, just enough for investors to speak to customers and see metrics around engagement and growth."

But there are exceptions. According to Seth, "If your company is building something around deep technology or something that has never been built before -- let's say a spaceship to Mars or a quantum computer -- a founder can raise by showing they can recruit the right technical team to build their product."

Published on: Sep 25, 2019
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