We all know that VCs operate within a roughly defined mission framework when supporting startups and scale-ups: pre-seed, seed, early stage (Series A), and growth stage (Series B and beyond). . However, I have noticed that, more and more, growth stage investors are investing in towers from the start.
Covid-19 has leveled this seemingly structured playing field by streamlining the process of accessing and determining which companies might best fit a VC’s portfolio. Yet according to Dealroom, the number of companies in the European ecosystem is decreasing while the amount of capital under management and the number of private investors are increasing.
The result? There is more competition than ever. With such varied and far-reaching interest in venture capital, founders will have a hard time choosing the right investors for their business, at the right stage. So how can you as a founder make sure you are making the right decisions?
Understand the context to use it
Investment conditions have changed and round sizes have swelled: in 2020, the median transaction sizes for seed rounds, Series A and Series B reached 1.3, 6.4 and 20 million dollars.
This is a staggering difference when you consider the median transaction sizes compared to 5 years earlier with figures equivalent to $ 0.6, 3.6 and 8.8 million respectively. According to Pitchbook, dry powder levels of venture capital and private equity reached all-time highs in early 2020, with over $ 1.5 trillion available worldwide.
As investment firms mull over how to roll out their dry powder, the industry is seeing large firms, historically more focused on late stage funding, taking an interest in earlier cycles. Traditional seed venture capital firms need to come up with higher values to keep pace and need to differentiate their offerings to maintain founders’ interest.
With so much care, as a founder you have to act smart to give yourself the best opportunity to get the right support.
Recognize the risks and don’t get distracted
The prospect of big chunks of capital can be tempting, however, it’s important as a founder to be disciplined. If you’ve thought about it and decided that funding would be right for your current situation, then go for it by all means. However, while the idea of accessing large funds is often appealing, too much money that is not really necessary at the start can complicate matters.
Sometimes large upfront sums can get in the way of founders in subsequent cycles if market conditions change or a business is perceived to be too expensive. In my experience, I have seen companies spend months, in some cases over a year, struggling to raise new funds at high valuations – even when investors see no red flags. It takes valuable time to focus on business operations and performance.
High numbers at an early stage can also cause founders to feel pressure – from them, investors, or market watchers – to scale and validate the huge vote of financial confidence, when it doesn’t. just isn’t the right time.
Seeding rounds, usually the riskiest step, play an important role in defining a company’s future success. Early stage businesses often need time and an experienced workforce to help them find the product-to-market fit and consolidate their offering and business model. Without investor support that truly matches a startup’s position and vision, the appropriate infrastructure is likely to remain absent.
This is why it is important to consider the monetary value of an offer in relation to other transactions of an investment firm. For example, partners may end up spending less time supporting a startup through tough times if the deal is small compared to others in their portfolio.
One risk that I think the founders I’ve worked with are unaware of is the ‘negative flag’: reputable investors may choose to make an initial investment, but then decide to refrain from participating in future cycles – for various reasons – raising questions within the community. The sparkle that might accompany the initial backing of a VC star name then becomes unnecessary scrutiny.
It’s best to make sure the VCs you get on board match your company’s current status in the area that is your highest priority. Deep pockets are valuable, as are personal and professional networks, technical or sector expertise and partner engagement.
A good VC is a partner, not just an investor. And in this VC, it is wise to choose the right partner who will best complement your business vision and working style. Simply put, productive partnerships and financial support are more valuable than an oversized check. Ultimately, it is important to remember that you are playing the long game.
It’s time to act smart
In addition to seriously considering the risks, founders can tailor their approach to their advantage.
Raising large sums of money relative to the status of your business is great if you are astute in putting the money to work for you. In some cases, it is likely that founders will receive a number of condition cards if their business does well.
However, it is wise to be humble. Even with term sheets from multiple VCs to choose from, “trading” them with the market is never a good idea and could jeopardize the cycle.
Being open to different funding structures can also work in your favor. For example, among the various options available, convertible notes allow startups to raise capital but delay a valuation until it is more appropriate – that is, until a company has sufficiently matured.
In particular, uncapped convertible notes mean that there is no guarantee for investors of the amount of equity into which their capital will be converted.
Do your research, trust your instincts
Fundraising is tricky and can be time consuming. If, when! – you are in the enviable position of deciding which investors to work closely with outside of a group, it is important to stay grounded.
I would suggest that you take the time to review all the offers and do your research thoroughly to put yourself in the right position to make the right decision. Ask yourself exactly what your business priorities are and what qualities you value most about a new partnership.
Good old-fashioned networking can provide valuable insight: talk to those around you to hear first-hand about the founders’ experiences that your potential investors have supported in the past.
At the end of the day, the key to success is often recognizing that you are playing the long game and want the right partner by your side every step of the way.
Published March 9, 2021 – 09:54 UTC