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How to Choose a Venture Capital Investor

As we prepare for our second round of venture capital financing at SalesCrunch, I thought it might be interesting to talk a little about the process we are going through to select the people and firms we want to work with.

I have raised a few rounds of venture financing in my career dating back to the first coming of the Internet in 1999, but there has never been a better time to be a technology company raising venture capital. There is more money available from more venture firms than ever before, even compared to the “web 1.0″ days. Back then there were only a few proven business models like ecommerce (Amazon | eBay) and online advertising (Yahoo).  It wasn’t clear then, nor is it clear now, if online advertising would be big enough to support more than a handful of select companies.  A disproportionate amount of ad revenue still goes to a few large players like Google, Facebook and Yahoo. Remember, advertising is all about reach and frequency, so if your audience is small….  Anyway, now there are several additional proven business models, including social commerce (Groupon | Gilt), social selling (Chloe & Isabel), virtual goods (Zynga), consumer apps (iPhone store), consumer subscriptions (Birchbox), marketplaces (TaskRabbit | WorkMarket) and software as a service (Salesforce | SalesCrunch:), to name a few.  There is also more liquidity from acquisitions and IPOs then there have been in a long time.

More proven business models and liquidity means there are more options than ever for entrepreneurs to raise capital.  So how do you pick your ideal firm? Here are a few of the more important things to consider:

  1. Vertical focus – first and foremost, focus only on partners and firms that have experience investing in your space. Make a list of the companies in your space that you most admire and research their investors, but avoid your competitors’ investors if the company is still active in their portfolio, as it will be a conflict of interest. When I left Trulia, most of my personal venture connections focused on consumer internet companies. Most didn’t have experience or interest in the consumerization of enterprise software. They took meetings with me because they knew me, but I ended up wasting a lot of time before I finally focused on people and firms that really understood and appreciated what we were doing.
  2. Stage – what you don’t want to do is waste your time pitching firms that are too early or too late stage. If you are raising $10M, an early stage firm with a $30M fund likely won’t be able lead the deal or write you a $5M to $10M check. Conversely, if you are raising $1M and you are pitching an $800M fund that has no track record of doing seed stage deals you are probably wasting your time. The other thing to be conscious of is how much of the fund has already invested and how much is allocated for future rounds in existing portfolio companies. If a firm has invested or allocated a large percentage of their fund you could be wasting your time. A good salt test is to see when they raised their last fund via press or filings and how many investments they made in the last year compared to each of the previous three years. If they raised a while ago and have slowed down considerably, you have a pretty good indication.
  3. Reputation - Now you have your initial list of ideal partners and firms, start doing your homework on which have the best reputations. You can search the web to quickly figure out which are the top tier firms in your space. You can also get a sense of the partners by Googling them and reading their blogs, but you will need to work a little harder to get the real skinny on people. Go on LinkedIn and figure out who you know in common and start asking anyone that has worked with them about their experience. You want to talk to entrepreneurs who worked with them in successful startups and ones that have failed so you know what to expect in both situations. I’ll do a dedicated post about the most important terms in a venture deal, but at this stage you just want to find out if the firms on your list have a reputation for fairness and for being entrepreneur friendly.
  4. Chemistry - you are going to have to live with your investors for a long time, so you better like them.  Chances are they will join your board and you will spend a great amount of time in good times and bad solving big problems and overcoming interesting challenges. Spend as much time dating them as you can with them before you get married.
  5. Geography – this is much less of an issue than it use to be.  When Trulia got started back in 2005, you needed to be in Silicon Valley to get funded as an internet company. Now, there are more hubs like New York, Austin and Denver and VC’s get on planes more than ever.  SalesCrunch has investors from New York, Silicon Valley and Boston. Groupon and 37Signals are in Chicago.  All that said, if you are a starving and/or unproven entrepreneur, you will have to move closer to one of the hubs to afford to take meetings and have VCs willing to invest in you.

We are very fortunate to have some amazing, top-tier investors already at SalesCrunch. We are just looking for one or two new investors who can help us take the company to the next level, so we only need a short list of four or five that match the above criteria to find the one or two we need. If you are starting from scratch, your list might need to be a bit longer and include lots of angel investors as well. This isn’t as comprehensive as it could be, but at least its a good start.

26 more posts to go in my 30 posts in 30 days challenge.  Its getting harder now.

Credits:

Image of Steve Jobs and Mike Markula provided by Ink Magazine

Image of iFund provided by The Christian Science Monitor

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