Essential Investor Pre-Qualifications
Essential investor pre-qualifications can be found online and include the name, location, and type of the VC firm, relevant partners, how you are connected, preferred stage and check size, fund size and firm activeness, competitive portfolio companies, and overall fit.
An investor list wouldn’t be much help if it was not qualified. Let’s start with the essentials, which are relatively straightforward to find out. Visualize a sheet with the following columns:
Name of the firm including where they are based, because there are rather large geographical difference in how VCs think and operate. The difference between Silicon Valley and non-Silicon Valley firms is especially pronounced, as I mentioned briefly in Who This Book is For.
You also want to make a note if the firm is corporate VC. Such investors are a bit tricky to deal with, because they often have strategic objections such as feeding into the R&D or M&A departments of their parent companies. That is why partnering with corporate VCs requires additional due diligence and well-thought-out deal-making.
Relevant partner(s) - this one often gets overlooked. You can’t pitch “Sequoia” - that’s a firm. Instead, you will be pitching a specific partner within the firm. Make sure to find out who is most relevant for your company based on their investment portfolio, media interviews, social media, bio, and so forth.
One key detail to keep in mind is that there are 2 kinds of VCs: General Partners and everyone else. In the vast majority of cases, General Partners (GPs) are uniquely empowered to make investment decisions on behalf of the firm. Everyone else is not - including Associated, VPs, Junior Partners, Venture Partners, and a myriad other titles.
Generally speaking, you should be targeting GPs when fundraising. That’s because talking with non-GPs means that now you have to convince 2 people - the non-GP you are talking to, and the GP that can actually sign the check. See Common Investor Replies for additional thoughts on talking to junior VCs.
How you are connected - this is one of the most important pieces - yet the element that founders most underinvest in. The key thing is to make sure you don’t have a single point of failure. You want multiple strong connections to a partner so that you have people you can rely on for introductions, backchanneling, and references. I discuss how to grow your network in Who to Network With and expand on how to use it in Phase II - Fundraising.
Preferred stage and check size - generally speaking, founders should target funds that are specifically focused on the current stage that the startup is in - i.e. seed funds if raising a seed round and series A funds if raising an A round.
At best, a mismatch can be a waste of time - for example, asking a $50M seed fund to write a $5M series A check doesn’t work because their fund economics won’t allow it.
At worst, a mismatch can be detrimental for the company. Consider a series A fund investing in your seed round. Founders are often excited by the idea of having a great brand name and collecting fewer but larger checks. While in the short-term that can be appealing, in the medium to long-term it can be quite dangerous.
By investing in your seed round, the series A fund has effectively bought an option in your company. If they choose not to exercise that option - i.e. not participate in or lead your series A round - that sends a negative signal to other investors, which can tank your fundraising efforts. It’s just tough to explain why an existing investor with an interest in your industry and internal company information is not jumping out of their way to lead your round.
Investors are aware of this dynamic, yet often say that founders need not worry. After all, while most startups fail, theirs will succeed! And your sponsoring partner promises to treat you fairly and understands you will need to run a clean process when the time comes for your next round.
While those are nice sentiments, reality often disagrees. Many companies are on a good trajectory but don’t turn into the monster rocketships that are no-brainer investments. Sponsoring partners leave, change their interests, or invest in competitors. And that can lead to challenging fundraising efforts for an otherwise fundable company.
Having seen such frustrations many times, I generally advocate optimizing for the long-run and targeting investors, who are right for your stage, while actively avoiding VCs, who might be too small or too large. If you break that rule, make sure that you have a very good reason for doing so. After all, fundraising is hard enough as it is - you don’t want to make it any harder unnecessarily.
Last fund size including when it was raised and whether the firm is actively investing - this information is generally public and can be found on various websites such as TechCrunch, PEhub, or the EDGAR database. I include this piece because it is important to get a sense for whether a VC is actually active. There are lots of zombie funds out there so beware!
Look for two major signals. First, have they had any new deals in the last 3-6-12 months? If you can’t find any, then the fund is unlikely to be active. Second, have they raised a new fund in the last 2-3-4 years? If they haven’t, that most likely means the firm doesn’t have capital to invest in new startups (while they may continue to support their existing companies). I discuss typical VC capital allocations briefly in Company / VC Fit.
Competitive portfolio companies - founders often fret about competitive startups, sometimes with a rather expansive definition of what constitutes a competitor. Personally, I have found that the vast majority of the time competition doesn’t matter - and doubly so for startup competition, which is facing similar challenges to every other fledging company trying to make it. So, unless you are engaged in one of those very public all-out wars (like, for example, between Uber and Lyft a few years ago), you can mostly ignore competition and instead spend energy on making your company work.
That being said, in the context of a fundraising and, even more specifically, of an investor list, I’d say that VCs who invested in a direct competitor should be avoided for two reasons:
First, to decrease valuable proprietary information leakage. I say decrease because VCs share decks broadly despite claims to the contrary. Your deck will be shared for the purposes of getting second opinions and expert assessments. You should assume that competitors are likely to see it. That sounds concerning but shouldn’t be too big of an issue. If simply reading your deck is enough for someone else to beat you, you have bigger problems and probably need to rethink your venture.
Second, to avoid wasting time because investors are unlikely to fund two plays in the same kind of space. Generally speaking, when VCs believe a thesis, they will research players and make their bet - and be done with it. That’s especially true for top-tier series A funds.
Note that I said direct competition - and I mean that in the narrow rather than expansive way. If an investor has a track record in adjacent companies, you should want to talk to them. They would know your space and thus might be a source of valuable information plus are more likely to be a believer already, which is what you are ultimately looking for.
Overall fit - founders sometimes like to go very exhaustive with their essential research. There is always another piece of information you can try to discover and assess. If there is something I missed that you really think matters, go for it. But at some point, you gotta call it a day and try to assess the partner’s overall fit as a whole.
I recommend summarizing your “fit” assessment with a simple “low, medium, high” categorization. There are no right or wrong answers - at this point, this is just a first semi-educated guess. If in doubt, I’d encourage you to be more generous because you never know where a potential believer might be lurking.
The point of this exercise is to provide a guide as to how to spend your time in the future. Two examples of that are when networking with entrepreneurs, and prioritizing investor conversations during the actual fundraise. Naturally, it makes sense to allocate more time to investors, who you deem to be “high” or “medium” fit and spend comparatively less time on those in the “low” category.
Note that when I talk about “overall fit“ I don’t mean “investor quality.” These are two distinct concepts. The former is about how likely it is to find an investor, who believes in what you do, meshes well with you personally, and is a good fit for the company.
By contrast, firm / investor quality has to do more with the general perception about how good a VC is - which is a mixture of PR and actual results. If you want, you can absolutely add this as a dimension to your investor list. Personally, I have found that finding one true believer of any perceived quality is worth ten “world class” investors, who are disengaged or even destructive (yes, that happens - more often than you think - more on that in Post-Closing). Ideally, you can find someone who is a great fit and is perceived as a high-quality investor. But often the world is imperfect and having a mental model about what matters to you can be tremendously helpful.
Most importantly: overall fit is a dimension you need to continuously reassess. It’s fine for your first take to be a semi-educated guess as mentioned above. But as you learn more - for example, by talking with entrepreneurs, executives, and investors - you should recalibrate. I talk about that process in How to Network with Entrepreneurs.