Founders: How to pick your VC?

Founders (or Entrepreneurs) are a brave and courageous bunch that have a bold industry defining vision. On that journey, they require lot more than just financing. E.g., Domain Expertise, help with PR & Marketing, Recruiting, Viable Exit Strategy, Follow Up financing, etc. Often, these things are overlooked, and fundraising becomes a numbers game. Quantity vs. Quality takes over. How many VCs can I pitch in six months? How many investor meetings in a week or month to achieve that goal? While money is green everywhere, it comes with strings attached. Then how should Entrepreneurs approach fundraising or pick a VC? 

01. Vision & Investment Principles Alignment

An Entrepreneur and a VC relationship only works if it’s built on a foundation of common goals and vision for the future. A VC must be able to see the long-term potential of a company, it's product or service, and help navigate the short-term hurdles based on broader investment principles. E.g., NIN Ventures – its mission is to democratize venture capital by making Crowdfunding available for all. This industry defining vision has a clear sense of purpose: to provide access to millions of investors to a new asset class: Venture Capital, with a direct investment benefit, which makes it a superior business model compared to other investment options currently available in the market. Here, the greater good is in alignment with a business model that investors require to attain higher returns.

02. Experience & Expertise

Generally, most VCs have an MBA or a Finance background. They have experience in Investment Banking, Private Equity, Operations, etc., or come from an Entrepreneurial background. It is also important that the VC understands your industry, technology, and market, and can provide valuable guidance beyond funding. i.e., business model, access to network of partners, exit strategy, etc. Often, this is the reason why Entrepreneurs get attracted to VCs with deep domain expertise with a track record of success within their industry. Most Entrepreneurs tend to shy away from first-time fund managers or non-branded VCs, given lack of track record. Historically, if you look at the USVC Index and First Time Fund Managers, First Time Fund Managers tend to outperform the USVC Index. While there are many factors that lead to this conclusion, the one main reason is first-time fund managers take highly calculated risks and back bold visions, generating higher returns. An Entrepreneur's experience and expertise also play an important role in picking the right VC.

03. Personality Traits

Certain characteristics like goal oriented, hardworking, disciplined, integrity, adaptability, etc., are all needed in any relationship. Often underrated is a sense of mutual respect and trust, needed for a healthy working relationship between a VC and an Entrepreneur. Transparency in communication and a good cultural fit are added bonuses. However, the most important thing is conviction in each other’s ability to navigate a turbulent path.

04. Fund

While it is important to check VC bios for their education, experience, sweet spot or investment strategies. It is equally important to check the status of the fund. How big is the fund? What vintage year? Are they still deploying capital? What is their investment due diligence process? Do they have other investments in the sector? Sometimes the age of the VC plays an important role, esp. if you require follow-up financing beyond the life of the fund.

05. Network

Often underrated, a good network of partners helps with sales, recruiting, partnerships, and other opportunities. Networks play an important role in the venture capital ecosystem by enhancing collaboration, improving access to investment opportunities, and providing essential support to entrepreneurs and their companies. The collective power of these networks not only drives innovation but also contributes significantly to the overall success of the venture capital industry. By fostering strong relationships and engaging with various stakeholders, venture capitalists can position themselves and their portfolio companies for greater success in the marketplace.

06. Reputation and References

A VC’s reputation in the startup ecosystem can be a strong indicator of their value-add and reliability. While it is important to speak to their founders and others who have worked with the VC to gain insight into their working style, supportiveness during tough times, and overall partnership approach, trust your gut. Also, the Internet can be tricky; ask intelligent questions, understand people, their intentions, and most importantly, read between the lines. 

07. Governance and Decision-Making Process

Every VC has a unique management style. Understanding how quickly and transparently a VC makes decisions can save valuable time. Some firms have lengthy approval processes, while others are more agile. Ask about their due diligence process, timeline, and who needs to sign off on investments.

08. Support During Downturns

The true test of a VC is not only how they act during good times, but how they support founders when challenges arise. Inquire about their approach during difficult phases – do they double down on their commitment, or do they pull back?

Also, read Ms. Desai’s blog: How should Entrepreneurs approach fund raising? Brand or NO BRAND? for more insights.