3 Factors When Choosing a VC

So you’ve got the introduction to that VC you don’t know, made that awesome presentation, and now you have to choose who to take funding from.

Until this point, you have raised some seed capital or bootstrapped your company, won some early customers, and generated revenue. The next step is to raise between $2 to $5 million which is categorized as Series A financing in order to accelerate growth.
 

3 Factors When Choosing a VC

 
1.    Size of the Fund: A rule of thumb, the larger the fund, the larger the required return for an investment to be worthwhile.

For instance, if a fund is larger than $500 million and invests between $3 to $5 million, they are going to expect an exit value of more than $100 million; especially when they own approximately 20 to 30 percent of the company. This is because their Return on Investment or ROI is no longer measured as percentage, but as a dollar amount.
 
This becomes problematic as the founders of the company would be inclined to exit at a valuation of $60 to $70 million but their investor is looking for that exit north of $100 million. Therefore, even though a big name Venture Capitalist looks exciting because of their name, personnel, and connections; you must keep in mind their overall objective.

2.    Deal Partner: They are the managing director or partner that represents the firm that you will be receiving money from. Making sure you have the right deal partner is critical, regardless of what round of financing you’re looking for. Their expertise, connections, and sound mentoring can help you navigate the rough waters ahead.

A strong name like Sequoia or Greylock can attract attention, but the right deal partner can go a long way.  The ideal deal partner becomes a part of your company and helps determine key future milestones. They will step in and lend a hand when needed and prepare the venture for future round of financing.
 
3.    Domain Expertise:  This is an extension of the deal partner, every firm usually has a specific domain expertise such as mobile applications, enterprise software, or business services. The firms most active in your specific industry and that are closest to your end-customers should be on the top on your list.

The advantage is that they have the experience of dealing with companies similar to yours; how you might stumble and how to help you grow through better execution. Additionally, they have great connections that can increase your user base and are helpful in securing the next round of financing. Even though you will be in direct contact with your deal sponsors, having other individuals within the firm that sit on different boards and can make introductions is extremely beneficial.

There are always exceptions to these rules based on your product, time frame, and objective; regardless, make sure you scrutinize anyone you partner up with; the relationship dictates your future.

If you have any questions, be sure to send me an email or post a comment.
Ashkan

Ashkan[at]greenhornconnect[dot]com