How To Understand A Venture Capital Firm

After spending a lot of time on the entrepreneur side of things raising money, it's been an eye opening experience being on the other side of the table. You read a lot of quotes in the press from individual investors, but rarely do you gain real insight into the inner workings of venture capital firms.

As an entrepreneur, a lot of venture firms looked the same to me. I remember going from one meeting to another to another raising money. After a few meetings in one day, all the investors would start to look the same. I realize now that I had very little insight into how the individual firms operated and what made the partners tick.

Raising money is a lot like any other sales process. Get a lot of interaction with your prospect and that typically means they are genuinely interested in what you have to say. Very few questions and little interaction either means they're ready to buy and don't really need to hear your pitch (not likely) or that they are bored but too polite to cut you off.

(Entrepreneurs who don't recognize the glazed eye look or the polite deferral are only going to spend needless time that they could otherwise be spending building product, recruiting, or selling. Similarly, responding too strongly to challenging questions can signal to potential investors that they should dig deeper on a particular point. Think about not just what you answer, but how you answer.)

Every firm operates differently and firms have different investment strategies. This is true even though it is often said that venture capital firms have a "herd" mentality with one firm following another.

There are many reasons a particular firm may give you a no or a polite deferral. One reason may be that the firm has already made an investment in a particular space. Or the firm feels that the space is overcrowded. In other words, a firm may choose not to invest for reasons unrelated to your specific deal. Alternatively, one firm may turn you down while another firm loves you and does the deal. A lot of it comes back to what the investment criteria are (explicit or implicit) for any given firm.

Venture capital firms are measured on their ability to deliver returns (although that said, more and more partner compensation is coming from fund fees than ever before). Just as in any other selling process, you have to ask yourself whether your product (in this case, you, your team, and your idea) will meet the needs of your customer (the venture firm you want to raise money from). It's easy to forget that venture capitalists have career objectives, goals, and people they report to too (their limited partners). The next time they raise a fund, they have to be able to articular their past results and their future strategy. Think about how you will fit into that strategy and you'll have some insight into what makes a particular venture firm tick.

Typically, you need to have a big play in order to raise venture capital money. The definition of big however varies by firm. Some firms only make bets that they feel will be worth a billion or more. Other firms make a mix of investments, diversifying and balancing their portfolio with investments that are likely lower return but also lower risk. (Just because you are not a match for one firm does not mean you aren't a match for another.)

So what's the right strategy? Stay tuned for my next post.