If you are one of the lucky companies that manages to raise venture capital in this market, here are a few tips in picking the right VC to work with.
Make sure their fund is at its lifecycle where you want to be
Most venture capital funds get fully invested over 4-5 years. After that there is only room in the fund for follow-on capital. If you are an early stage investment, you want to make sure that you are raising money from a new fund. That way you have time to build your business and won’t experience as many end-of-fund pressures.
If you are getting money from a fund that is nearing the end of its life-cycle, you might be forced to sell the company earlier than you had planned (as the partners may want to try to wind down the fund 7 years after its inception). Alternatively, a secondary fund may buy the fund that invested in your company and you’ll now have to build a relationship with a whole new set of investors (this is becoming increasingly common).
Make sure the partner is not going to get canned — you might wind up with a partner you don’t like
Often you choose a fund not because you like the fund, but because you like the partner. And since you are likely going to have close relationship with the partner for many years, it is really important that you like, respect, and get along with this person. It is also important that they add value to board meetings, company strategy, etc.
Nowadays, with funds likely pairing back the number of partners, it is also important that you choose someone that isn’t going to be booted out of the partnership. If that happens, the venture capital firm will assign another partner to your company and you may not have a say as to who it is. So you should spend time understanding the partner and their portfolio companies. Is this someone who is backing other companies that are likely to be winners? Is this someone that has done well in the past but has had no winners recently and might be asked (or choose) to retire?
These are some of the things to consider if you are one of the lucky companies to raise venture capital these days. Good luck.
i’d add an additional criteria which is really really hard to judge but important: how successful is their current fund. IMHO one of the big investorentrepreneur conflicts is that they spread the risk among multiple companies and look for some homeruns to return the fund, while the founder just has their single company. Accordingly i’ve seen VC’s push entrepreneurs to sometimes shoot for a bigger play than fits the start-up simply because they need a home run. They encourage the start-up to take more money than they need, turn away from smaller premature buyout offers, etc. If you’re lucky enough to have your choice of VC investors being in the middle of a fund with one or two anchor winners already selected seems better than being early into a fund.
but this is really splitting hairs – it might just be easier to go by VC partner reputations because those who persistently push their agenda over the entrepreneur aren’t going to be successful in the longrun anyway.