The most common fundraising question I get from founders is “what do VCs look for in a startup?” Aside from the obvious strong team, I tell them this:
Each one is unique.
When approaching VCs, this is important to understand. You should do as much homework as possible before approaching any VC. Here are a couple things you should try to find out if possible.
Stage
The first thing you should learn is what stage a VC invests in. Broadly, VCs invest in early, growth, or late stage. Specifically, they may invest only in Seed, Series A, Series B, and so on, but most will be interested in a couple of these.
Thesis
Most VC funds have a thesis. Some as broad as B2B vs B2C. Some invest in one or more specific industries, like SaaS, Finance, Smart Home, Automotive, and so on. Within an industry, they may have specific areas of interest. This thesis may be driven by what they see as opportunity (good markets to invest in), their areas of expertise, or their network. Often the VCs communicate this thesis to their LPs, so they may invest strictly within their thesis, while others may be more open. In addition to funds having a general thesis, each partner in a fund will usually have their own areas of interest.
Round Size/Check Size/Ownership %
This is similar to stage, but worth noting separately. Many VCs have a range for a check size they’ll cut in a first investment (different from follow-on check size). They’ll probably have a general round size they’re interested in investing in. Combine these two, plus stage, and past investments, and they’ll get a sense of ownership %, which is also important to them.
Frequency
VCs usually know how frequently they plan on writing checks. Active ones may write multiple checks a month, while less active ones may write only a handful a year. This frequency can be cyclical, based on their own fundraising status and amount of capital left in their current fund.
Decision Making Process
VCs vary in how they make investment decisions. At a fund with a single GP (often smaller funds), this is pretty straight forward. Most bigger funds have multiple partners, and this is where it starts to differentiate. Some funds need unanimous agreement amongst partners, some need majority, some might have a unique voting structure, and some only need one partner to want to invest. No matter the case, you’ll usually be working with one partner who is selling this investment internally. If you’re working with an associate or principal, it might be worth trying to understand how they fit into the process.
Due Diligence Process
Due diligence happens before decision making, and can vary by VC. It can include everything from multiple meetings, meeting you in person, having you meet the whole partner team in person, reference checks with references you provide, reference checks with references you don’t provide, checking in with expert colleagues, and a whole lot of other stuff (exit analysis, competitor analysis, market analysis, etc.).
Lead vs Follow
Quite simple, but some VCs will lead rounds (some prefer this), while others will only follow. The ones who lead rounds are setting terms, and the ones who follow will often look at who is leading the round as important data when making decisions.
Post-Funding Support
Some VCs are hands-off and don’t get too involved after investing in a company. Today, many VCs use their ability to support companies as their differentiator, earning them a seat in hot rounds. The ways in which VCs support their portfolio companies differ as well, from making introductions to emotional support to actually getting their hands dirty in some operational stuff.
Past Investments
This one should be relatively easy to find out (hint: Crunchbase). You should be able to extract some general ideas about thesis, stage, and maybe even frequency through studying their past investments. It’s also worth noting that VCs tend to have a bias toward or against patterns they’ve noticed in their own investments (ie. “I was burned once by an investment in a company selling to SMBs so…”).
There’s probably a couple important ones I’m missing, but the above should be a good list to get you going. Just remember:
VCs are like snowflakes, each one is unique.
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