This blog has talked at length in the past about how to raise a round, especially a seed, and building an investment syndicate. This article is an extension to a previous post “Lead VC — Does It Really Matter?”
1) You Matter To Them
In general you will matter to a fund if they are putting 1-5% of their fund size into you. If a $1B fund is investing $1M into you then you are 0.1% of their portfolio. Chances are then they are buying an option value i.e., putting some money now to be able to put much more to work later. The flipside is they could just end up passively waiting for the next round, committing at most to prorata, or in the worst scenario orphaning the deal. In all these cases the market will likely ask what happened aka you run a signaling risk. At Tau we advise entrepreneurs to typically raise from small funds for small rounds and from large funds for large rounds. What is small or large is obviously different in different parts of the world, different industries, and ever-changing. And not to say you can’t bend the norms, just that if you do you should be aware of the risk-reward.
2) They Are Engaged
At Tau we believe in the long run the partner championing you matters more than the fund they work or even the deal terms. Some VCs will not fulfill any of their promises, most will do something, a few go above and beyond. But getting a good investor is half the battle, the other is to ensure they actually give you time and attention. A good way to pre-vet an investor is to look at how many deals they are managing. Two key factors to consider when looking at all their deals: are they leading versus following and sitting on the board versus board observer versus no formal role. With all that said, a partner that is quite active in their deals can typically manage 10 at any given time.
3) Raising Capital Unexpectedly Or Opportunistically
At some point it’s very likely you will want to raise more capital quickly. Going back to your existing investors is the most efficient route for that. Bad news (e.g., markets are going down) is obviously harder than good news (e.g., looking to do an acquisition). Regardless, there are things you can do beforehand to make it easier. Warrants sweeten the deal – if an investor has them they have an economic incentive to do more for you. Formalizing a board creates a forcing function – if a $1B fund put $1M into you then you could require them to sit on the board, even if it was a seed stage.
4) Raising A Formal Round
The converse of #1 is the investor should also matter to you. The definition of a lead VC is the entity setting the terms. There is an expectation they will be putting in the most amount of capital in this particular round and almost always that is indeed the case. A co-lead happens when two entities agree jointly to the term sheet and put in the same amount of money. The norm globally is the lead puts in 40-60% of the round. A lead with a higher percentage means you are relying much more on them, may not have enough space in the round for others, and thus not accrue the advantages of a true investment syndicate. A lead with a lower percentage runs the risk of creating a party round where no single investor has enough skin in the game.
5) Helping With A Good Exit
Getting a new lead for every round is the classic way of fundraising. The two core benefits are you maximize the amount of help you get plus the market will see your company as being strong enough that new investors are competing to take the bigger position. The ancillary benefit is that it then also helps with an exit since you have multiple networks of contacts to rely upon. Remember VCs come in various shapes and forms, some are better as leads for the A bringing product-market fit, others are better for the D because they are optimized for an exit.
Originally published on “Data Driven Investor,” am happy to syndicate on other platforms. I am the Managing Partner and Cofounder of Tau Ventures with 20 years in Silicon Valley across corporates, own startup, and VC funds. These are purposely short articles focused on practical insights (I call it gl;dr — good length; did read). Many of my writings are at https://www.linkedin.com/in/amgarg/detail/recent-activity/posts and I would be stoked if they get people interested enough in a topic to explore in further depth. If this article had useful insights for you comment away and/or give a like on the article and on the Tau Ventures’ LinkedIn page, with due thanks for supporting our work. All opinions expressed here are my own.