When fundraising from venture capitalists, it is important to understand their perspective when preparing decks and framing the pitch for your startup.
Basics of VC Funds
Founders can benefit alot from diving deeper into The Basics of VC Funds when preparing pitching materials and focusing on VCs to pitch. Viewing the venture capital industry and asset class from the investor’s standpoint can give founders insights into how VCs make decisions and the reasons behind their investment criteria. For example, most VCs pay careful attention to criteria such as the Total Addressable Market (TAM). This is because each startup in the portfolio of a VC fund should be able to return the entire fund on paper, in the VC fund model. Therefore, if your startup does not meet this fundamental benchmark, you may have to focus on a different set of VCs, e.g., micro-funds, as opposed to large ones. You can reverse engineer compability with VCs by factoring in the size of the fund you are targeting and the ownership percentage you are offering with respect to the TAM.
Additionally, it would be best to have a basic grasp of Fund Mechanics as explained here. This can enable founders to refine their focus further and tailor their pitches to each VC's criteria. One thing to look out for is the time elapsed since the fund was launched. Venture Capital funds typically have a closed-end 10-year structure, meaning the fund is dissolved after this pre-agreed period. Therefore, VC fund managers usually invest a certain proportion of the capital within the fund at the start of this period. The remaining capital is typically held in reserve for follow on rounds of the best performers within the portfolio. Consequently, it is improbable that a VC fund will invest in new startups towards the end of its lifetime. When speaking with VCs, founders should keep this in mind and ask questions to determine potential alignments on this front.
Titles & Roles in VC Funds
It is also significant to form contact and build relationships with the right individuals within the fund. Venture Capital Roles can be confusing, and founders should determine if their point of contact within the fund can sponsor and champion deals. Founders should seek to develop relationships with the Partners in the firm that sit on the investment committee, as these individuals have the power to write checks and fast-track deals. Typically, without a warm introduction, founders will have to go through screening processes supervised by junior investment team members. Associates and Principals are valued members of the investment team and can often make recommendations to Partners, depending on the VC firm. However, it would be best to make contact with Partners directly when pitching your startup to increase the odds of success.