The Guest List Dilemma
When you start the quest for your next capital raise, creating a viable list of prospects is one of the first things to do before hitting the road. Here’s some basic advice on how to get this going. Although most points will sound familiar to experienced entrepreneurs, we liked to present this bundled outline since we still see a lot of suboptimal approaches passing by such as.
- Limiting your reach-out to the 2-5 VCs you’ve know personally for years
- Sending your investor deck to a mass query of 150+ unselected VCs
- Exclusively chasing Tier-1 VCs whose names pop up in every top list on Google
We hope the tips below will help you in making a selection who among the VC field might be a good fit for your company, now and in the future. The main objective to keep in mind here is to create a list that is a) lengthy and targeted enough to maximize a positive funding outcome and b) is concise enough for an entrepreneur to follow-up on and to start building quality relationships on over time.
How To Compose Your Prospective Investor List:
Tip 1: Industry verticals
The first thing to do would be to check whether a VC is active in your domain. There is no use in pitching an oligonucleotide CNS drug to an investor fully invested in digital health for example. Some VC’s maintain more generic portfolio’s where others are highly specialized within a certain industry. Most VCs will tell you about their investment focus on their website.
Tip 2: Investment stage
There are VC’s that focus on the late stage, while others feel comfortable and provide terrific input in the very early stage. If a VC ticks all the other boxes besides this one you might try to pursue the opportunity anyway- as some firms invest outside their sweet spot when they find a product or team they really love.
Tip 3: Fund size/Average check size
The two of these often correlate. If you are raising a EUR 1.5M seed round a fund with EUR 1.2B under management is probably not going to be a good fit. On the contrary, trying to stuff a EUR 30M dollar Series-C in a EUR 150M fund would be neither. A general rule-of-thumb would be that a VC is willing to allocate max. 5% of its fund size for a first-time-investment.
Tip 4: Fund life cycle/Dry powder
Although some funds are revolving, most VC’s are structured with a limited lifespan to enter into and exit from all its investments. Hence it is useful to consider a fund’s vintage to see whether they are open for new deal flow. A quick filter for this would be firms that have raised a new fund in the last 3-4 years.
Tip 5: Geography
The role of location of the VC will always be debated. Generally we tend to follow the line that for the early stages (Seed/A) it is practical (think: board meetings) to keep the round regional (e.g. EU) and to broaden the scope once business activities scale (e.g. FDA routing) and VCs come into play that invest globally.
Tip 6: Lead vs. Follow
Some VCs prefer to lead, others never do. Qualifying investors by lead vs. follow will help you to prioritize your time in the right sequence. That doesn’t mean disqualifying non-lead investors, but to take notification and circle back to them once you have found a lead investor.
Tip 7: Track-record
Have a look at the expertise and past performance (e.g. successful exits) of the firm and its partners. High-reputation affiliates create substantive value to your venture. On the other hand, past success does not guarantee future ones. One could argue that previous wins might make VCs disinterested in mid-range outcomes or ventures that take significant effort and hence make a case for a first timer that’s eager to put in the hard labor.
Tip 8: Fund activity
If the firm has not made an investment in the past 12 months, or has not raised a fund in more than five years, the VC might no longer be operational.
Tip 9: Competitive investments
This is something to be wary about. Very few VC’s make second bets. Another way to look at it is to reverse the question: how would you feel if one of your shareholders would take a stake in one of your key competitors?
Tip 10: Personal fit
In the end, you will have to deal with the VC firm for years after closing. From this perspective it is highly valuable to have a partner aboard that at least has a good understanding of your business and is available to advise, leverage his/her Rolodex and put in the work. This one might be hard to judge from a distance, but a way to go about is to check upon references from other portfolio companies.
As most of the data points above are scattered over the internet and will be very hard to digest in a structured manner, we highly recommend to employ a comprehensive data support system (or an advisor who has a license) like Pitchbook, CB Insights or GlobalData. Although no single tool is entirely complete on its own this will help immensely in filtering through the metrics above.
During the selection process it would be advisable to set-up a list which allows you to track progress, log contact moments and contact details (excel/google sheets works fine). This also will help you to think about your fundraising contacts more in CRM terms than one-off hits. We highly believe in building a circle of investors around your venture who might be willing to invest at some point down the line and frequently circle back to them also without a direct funding request.
Finally, this effort should ideally result in a list of 20-50 suitable investors which might later be ranked in A/B/C qualifications based on the chance of deal success. This full exercise will be most intensive during your first raise of venture capital as from Series-B onward you will hopefully benefit from the leverage of your existing investors network and be well imbedded in the VC ecosystem by then.
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