As I discussed in a recent article (Announcing Profian), we recently received seed funding for our start-up from two Venture Capital firms: Project A Ventures and Illuminate Financial (thanks again, folks!). When you’re looking for start-up funding, in my experience, you’re focussed at the beginning on one thing, and one thing only, and that’s money. The clue’s in the phrase: raising a funding round is about, well, funding. So you might think that the answer to the question “what 3 things do you need from a VC” is “money, money and money”. However, you’d be wrong.
I found, at the beginning of the process, that this was absolutely our focus. This was our first time doing this, and we were desperate to get enough money to be able to start the company and get things moving. That didn’t change, but along the way, I received some very good advice about other areas we should be thinking about, and I really think it’s worth sharing this perspective from a first-time start-up founder.
OK, so the first one is money, but it’s not money at any cost. You need to have enough funding to be able to see your way through to your next injection of cash (whether that’s an A Round, loans or just revenue), but a VC-led seed round isn’t the only way. There are angel investors (we had some in our seed round, in fact – thanks to them as well!), enterprise capital, crowd-funding, grants and other options. Even if you are going to do a standard VC-led seed round, you need to think about how much equity (your share of the business, as a founder) you’re will to give up, what further financial help your VCs will give you in the future, what timescales they’re looking at, and what sort of exit they’re looking for. For instance, if they want to sell the company as soon as possible and you want to spend 10 years building a multi-billion business, you need to consider whether they’re the right investors for you right now.
What is your relationship with your investors? What personal chemistry do you share? How well do you get on? Do you trust them? Are they people you can contact for advice when you have a tricky problem? What experience can they (or their partners) bring to the table when you encounter a situation which is new and you could use some guidance? I’m not suggesting that they should be the first person on your speed-dial list for every bump in the road, but you’re going to be spending a lot of time with these people over the next few years, and their views, expertise and advice are likely to be instrumental in the successful running (or unsuccessful running…) of your company. If the relationship breaks down, they can make life difficult for you (very difficult, if the board composition is such that they can control it). You want people who you trust, and preferably get on well with: these should be people you can turn to when things are tricky. They have experience which should help you navigate difficult situations – particularly ones which are new to you, but which they’ve seen many times before.
VCs bring networks with them. They should have a portfolio of companies who they have funded in the past, and set of companies they didn’t end up investing in, but continue to be on good terms with, companies they’re considering investing in, and the customers and business partners of all of those companies. You want to be choosing investors who can put you in front of all of these people as possible partners and customers, experienced hands and even future investors, and you want them to be relevant. If you’re launching a consumer financial product, and all of your VCs’ networks are in institutional medical pharmaceuticals, then you should probably reconsider. Choose investors who can help you.
There’s another type of network: some VCs are what are called operational VCs, meaning that they provide specific services for their portfolio companies. Some of these may be free, others provided at discounted prices, and they may include everything from branding services, marketing, accounting, recruitment or the opportunity to embed one of their staff in your organisation for a while to fill a requirement while you find a permanent employee. Again, choose investors who can help you.
Without funding, your start-up will, eventually, fail, or it just won’t happen. You need money, and the venture capital market (it is a market) is one proven way to get it. It can be a hard slog to get the initial interest – we got very close to giving up – but once you do get that initial “bite”, try not to jump for the very first VC who shows a sign of giving you a termsheet. We decided not to follow up with a number of VCs for all of the reasons above (specifically – differing expectations on exit; no personal chemistry; no strong match with portfolio), and are happy with our decision. If you’re going to make your start-up business succeed, it deserves – and you deserves -the best fit: and that’s not just money.