Selecting a VC
How to think about Venture capitalists?
Many people think of Venture Capitalists as providers of money, but Venture Capitalists are a lot more than that. When partnering with a VC firm you are bringing in new co-owners to your business. And, a good VC firm will bring much more than money to their new ownership position. VCs add the most value when they can leverage their experience, skills, and network of contact, amongst other things, to add value to their portfolio companies. As such, selecting a VC firm is one of the most significant hiring decisions an entrepreneur will ever make.
What should entrepreneurs look for in a VC?
Operational Experience
While a VC does not need to have been a successful entrepreneur or business executive to add relevant business insight to a company, having such experience can certainly help.
Many young companies may lack a certain functional skillset or have not led businesses through certain phases (e.g., scaling a small sales team to a multi-million pound revenue generating machine). As such, partnering with a VC fund with experience in building successful businesses and a willingness to leverage that experience to assist their portfolio companies is a key attribute to consider.
Knowledge and background
Almost all entrepreneurs will know more about their business than the VCs who may invest in their companies. Nonetheless, it is not ideal if an entrepreneur needs to educate the VC on the basics of their business. Therefore, it is prudent to speak with VC funds and Partners within those funds who bring industry and product experience that is relevant to your company, as this enables them to add more value.
Strong Network of People
How many times have you heard the saying, “It is all about people”. While it may not be 100% accurate, the people an entrepreneur employs and has access to as his/her circle of advisors will go a long way in determining if their business is successful. Therefore, consider how well-networked your VC firm and the partners within it are? Will the VC be able to open doors to potential customers, board members, partners, that the entrepreneur would normally not be able to on their own?
A Good Cultural Fit
The ability of an entrepreneur to get along with a VC fund is critical, as they will be a co-owner with a significant stake in the business. Understanding the value system and working style of the VC fund, and the partners within it that you will be working with is critical to ensuring your partnership with a VC is constructive and value-creating. Do the VC think they know all the answers, or are they down-to-earth professionals who will work with you as peers to jointly find solutions to the challenges the business faces.
Success in Helping Small Companies Grow
There are many VCs in the world, but a only a small handful that have a strong track record of success in growing businesses. Hence, examine if the VC has either within their current fund, or from their previous funds, or from past work experience, successfully built small businesses into big ones. Some VCs bring more of a financial background to the table and have not had real operational experience in scaling businesses.
Strategic Vision
Many entrepreneurs are deeply and intensely focused on the day-to-day operations of the business. At times, this may mean they are dragged down into the minutiae of running a start-up, limiting the amount of time they can focus on strategic issues. Therefore, when considering a VC, assess if their backgrounds and skill sets allow them to assist in developing a strategic vision for the business and providing a sounding board for the entrepreneur on the big issues their business faces.
Stage, Sector, Size and Geography
Many VCs will specialize in certain industry sectors or geographies, or have investment guidelines that determine the size the investments they offer companies, as well as what stage of company they prioritise. Be sure to assess if the VC’s investment policies are aligned with your business needs and strategic direction.
At what stage will the venture capitalist invest?
It is important to be aware of how venture capital companies view investments opportunities based on the stage of the companies development.
- Seed: The beginning of a company’s life cycle when it is developing a business plan or prototype product.
- Start-up/early stage: The period during which the company is developing the product, manufacturing, testing with early customers, through to early customer sales.
- Growth: The company is generating revenue but needs more investment to develop further products, expand geographically, or increase capacity.
- Pre-IPO: This form of funding occurs to bridge the financing need towards completing an Initial Public Offering.