Venture capital firms typically segment across three dimensions—sector, stage and size. Match with venture firms that know your industry, invest in your stage of business and can invest at the level you are seeking.
Many people think that in order to attract venture capital, you've got to go to one of the centers of venture capital—California, Boston, New York City. And in many cases, unfortunately that is true. Seventy percent of all venture capital, at least in the US, is concentrated in one of those three areas. Every firm is different in terms of where they like to invest. Some firms, particularly early stage firms, like to be very close to their entrepreneurs. Other firms are global firms, later stage firms in particular where they can evaluate an entrepreneur and a company not just by getting to know them personally, but by evaluating their business, their product, their financials, which can be done much more easily at a distance.
So venture capital firms typically segment across three dimensions—sector, stage, and size. The sector that a firm focuses on depends really on what the partners like to invest in, where they have history, whether it's software, internet, or biotechnology. So for example, Polaris Ventures is a Boston-based venture capital firm that has had great success in the life sciences industry. They employ scientists, PhD's, MD's as investment professionals, not just your typical MBA.
For entrepreneurs, it's best to match with venture firms that know your business. They can help you with network development, business development, recruiting, strategy, all because they've had history and expertise in that particular field. Stage is how early or late they like to invest, whether it's right at company inception or whether it's in the later stages when a company has already achieved meaningful scale and is now profitable and ready to take it to the next level.
So venture firms specialize in different stages because the problems that entrepreneurs face at different stages are radically different. In the early stages, you're looking for hiring that initial team, customer discovery, finding product market fit. In the later stages, it's all about scaling, systematizing your processes, and maybe even preparing for an IPO. The firms that are good in the former are not necessarily the firms that are good and have expertise in the latter. And then, size is how much they like to invest, whether it's a small check like a half a million dollars or a million dollars for a seed fund, or some of the large scale venture capital firms like to invest as much as $100 million into an individual company. The size of the check that the venture capital firm wants to invest in your startup is going to be dependent on the size of their fund. And so you've really got to do your research on the size of the fund that they're investing out of, and what their parameters are for how large an investment they like to make.
Other things that you should do research on are whether the firm likes to lead the deal or follow, who they like to co-invest with, whether they back the entrepreneurs for the long haul, or whether they like to bring in their own management teams. There is so much information available online about what firms like to invest in—blogs, Twitter, various news sources. The burden is on you to investigate what firms like to invest in, at what stage, how much they like to invest, and whether it's a fit for your venture.
What's the best way to get to a venture capitalist? A warm introduction. If there's one piece of advice I hope you'll listen to in this video series, it's never, ever cold call a venture capitalist. Don't email them cold, don't send them a LinkedIn message cold, don't tweet them cold and expect for them are respond to you. You need a warm introduction, not a cold one. The people that I like to listen to are my former entrepreneurs or current entrepreneurs, other successful entrepreneurs that I may not have invested in but I admire, service providers that I respect like lawyers and headhunters that specialize in the startup world. Get to those folks and use them to get to us.
So when I was an entrepreneur and we were starting Upromise which was an educational internet company, the target investor that we had in mind was Kleiner Perkins, John Doerr. We felt he was the best person in the world to be our investor. He knew about the internet from his investment in Google, and he knew about education and had a lot of passion for it. But we didn't know John Doerr, and John Doerr didn't know us. So what did we do? We researched our network and researched his network and found that we had a few points of intersection. One entrepreneur that he had invested in was a friend, another person we knew we could get to who served on a board with him, and a third personal contact that we had in common. So we went to each of those three people, pitched them on what we were doing, convinced them that what we were doing was interesting, and at the exact same time had each of the three of them contact him and suggest to him that he meet with us. So you can imagine you're John Doerr, a venture capitalist, and within the span of a few days, three people through respect tell you about this cool, hot startup in Boston called Upromise that you have to meet with. Well, he took the meeting, and happily he became an investor in the firm.
Bussgang, Jeffrey. 2010. Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Own Terms. New York: Penguin Group. Chapter 3 “The Pitch: The One in Three Hundred”.
Jeff Bussgang. “Getting Introductions to Investors – The Ranking Algorithm.” Seeing Both Sides. Blog Post. Jun 12, 2014.
Jack Tankersley. “How to Approach Venture Capitalists.” Meritage Funds: Growth Equity Blog. Jan. 2 2014.
Questions for You
Which VC firms invest in companies similar to my stage of business? Are they geographically close or far away?
Does the VC firm I’d like to obtain investment from have any background or experience in my company’s industry?
How big should the fund be of a potential VC firm I’m looking at?
What connections do I have that could link me to a potential venture capitalist that would make a good investor?
Questions for Your Team
What connections do I have that could connect the company to a potential venture capitalist?
Tools and Exercises
Do Your Research: Find out whether a firm likes to lead the deal or follow? Who do they like to co-invest with? Do they back the entrepreneurs for the long hall, or do they like to bring in their own management teams?