Insider Info on How VCs Approach Series A Investments

January 18, 2017

11:20 am

When it’s time to take that next step towards a Series A, gathering all the nuggets of wisdom before you take that leap can, for the most part, set your expectations and help you understand the process. In a recent panel, we asked venture capital investors how they approach Series A investing.

Participants in the conversation included, Hamet Watt, a board partner at Upfront Ventures, Jenny Fielding, managing director at Techstars, Jon Goldman, a venture partner at Greycroft Venture Partners, Nicole Quinn, a partner at Lightspeed Venture Partners, and Ryan McIntyre, managing director at Foundry Group.

For those with less time on their hands, here is a summary of some of the topics we discussed:

Each VC Approaches Investments Differently

Unfortunately there’s no real cookie cutter answer as to how VC’s approach investments at key stages like seed, series A and later stage investments. They each had a bit of a different approach in terms of target ownership amount, range of investment size, desire to hold a board seat or not, industry/sector focus, and geographies in which they consider investing.

It’s suggested as you begin to narrow down your choices for investors to learn how they approach deals from other, founders or those in your network.

Do Your Homework Before Approaching Investors

Given how differently each fund and even each individual investor within a fund approaches each of the above items, it is critical that founders do their homework on each investor they may wish to approach before attempting to do so.

Entrepreneurs can do this homework in any number of ways, from finding articles or interviews from investors, following them on social media, pattern matching against past investments, and getting feedback from other entrepreneurs who may have worked with them in the past.

Don’t Forget the Exceptions

Given all of this, it is critically important to remember that in venture capital, each individual investor may have a set of general guidelines they use when making investments, but almost every investor can cite instances where they’ve deviated from their guidelines in the past.

That said, the closer your company is to matching their sweet spot for an investment, the more likely it is that they’ll want to engage with you.

VCs Invest Time on New Markets

Investors spend a considerable amount of time getting up to speed on emerging technologies, and often they are learning about these technologies roughly within the same window or curve as entrepreneurs who are building businesses around them.

VCs do all sorts of things to dive deep on new technologies including reading articles, attending conferences, and meeting as many founders and companies as possible. Founders, keep this in mind, especially if you are working in an emerging area.

There is nothing disingenuous about a VC meeting you as part of their learning curve, but one thing you can ask when meeting a VC is to understand how likely they are to make an investment in your technology focus or business focus in the near future regardless of whether or not it is in your company directly.

Referrals Drive Deal Flow

There are lots of services on the web now to help investors gather intel about a space including Mattermark, Pitchbook, CB Insights, and more. Investors are more likely to use these in a diligence phase of an investment they are contemplating rather than using these for sourcing of new investments.

It’s well known that investors source the vast majority of their new investments via referrals from other founders, other investors, and trusted members of their personal networks. What this means for founders is if you are trying to engage a specific investor, the stronger the referral you can get, the better chance you have of securing a real conversation with that investor.

It’s always useful as founders to spend some time helping other founders. You never know when good karma can be helpful to you down the line, especially when the entrepreneur you helped two years ago goes on to close a funding round with a top VC and is glad to help you with an intro in the future.

Syndication

VCs engage in what is called deal syndication. This is when a VC knows they want to invest in a deal, they will often work to bring other investors in the deal that they think can be helpful to the company in the future.

Their approach to syndication can change on a deal-by-deal basis. On some deals, an investor may want to take the bulk of the round in order to achieve a target ownership percentage, while in other deals, they strategically may want to bring in a co-investor who they know can lead a later stage round in the future if necessary.

Various factors can change their approach on this such as whether the company is pre-revenue, pre-product, or in a less mature market.

Product Market Fit

VCs often talk about whether a company has achieved product market fit, but this is a fairly subjective factor. Some investors may have key metrics they want to see a business achieving in terms of revenue or growth before deciding to invest.

Finally, one last point to consider is that venture capital investment is only one of many means you can use to grow your business. You can of course bootstrap by living within the means of the revenue you directly generate. If you are working on a new technology, there are often grants at your disposal such as NSF SBIR grant.

If you have time, check out the full conversation with these VCs on Periscope.TV for more details and tips.

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