Navigating the Partnership Jungle: 3 Crucial Tips for Founders Seeking the Right VC and PE Investors

Entrepreneurs and startups face a daunting challenge when it comes to raising capital and scaling their businesses:

• Only 0.05% of startups receive funding from venture capital (VC) sources.
• Competition for funding is stiff, with major VC investors receiving thousands of pitches yearly.
• Of the VC-backed startups that get funded, only 2.5% make it to unicorn status.

Following the excitement of coming up with a new idea and the backbreaking work of transforming that idea into a reality, the uphill climb of securing VC or private equity (PE) funding to scale the business can seem like an insurmountable hill to conquer.

This dynamic can put founders on tilt and make them susceptible to taking any deal they can get instead of proactively seeking out the right deal — and it can cost them dearly.

Let’s talk about the realities of the VC and PE world, its different players, and three critical factors to keep in mind when seeking VC and PE partners.

It’s a Jungle Out There

I’ve been on both sides of the table, an entrepreneur scaling an innovation I believed in and an investor looking to invest capital in compelling early-stage companies such as Cesium, ID.me, LeoLabs, Sayari, SpaceX and Ohanafy.

On the entrepreneurial side, there are often intelligent, passionate people with big plans who are eager to acquire funding to get them to the next growth stage. On the capital side, there are a wide range of investors, including major Tier 1 firms (think Andreessen Horowitz, Khosla Ventures, and Sequoia Capital) and an array of smaller and mid-sized entities.

Many entrepreneurs define success by securing funding from a Tier 1 partner with a household name, but it’s essential to recognize the realities that come with Tier 1 partnerships.

The benefits are obvious: deep pockets, press and notoriety, and the tacit endorsement of an internationally recognized organization betting on your company.

On the downside, many entrepreneurs who partner with Tier 1 investors face a rather unfavorable term sheet. The resources and prestige of Tier 1 funding come at a steep cost, and if your idea is good enough to warrant funding from those institutions, you might actually have options that will be much better deals for you in the long run.

Rather than focusing on top-level metrics such as fund size, total assets under management (AUM), or number of deals, tech founders would be wise to select VC and PE partners based on three other factors that have been instrumental to my success as an entrepreneur and investor.

Culture and Compatibility

Culture gets considerable attention in startups from the recruiting and HR perspective, but consideration for partnerships and investors is just as important. While these relationships appear transactional, being an exchange of funds for equity or ROI, successful partnerships are anything but simple transactions.

On a practical level, you will spend a great deal of time with the investors you partner with. Make sure you like them and that all the personalities involved are compatible. Try to get a sense of how it will be to work with them when the chips are down, and there are challenges to be overcome. A few basic first steps can help you make a reasonable determination.

First, spend as much time as you can with potential investors. Get to know them and learn how they view their role in the VC space. Look for opportunities to interact with entrepreneurs and founders who have worked with your prospective investors. Be sure to look at their track record. How have their previous investments fared in the long run? How did the previous founders interact with the investors? How have the investors helped or assisted the founders with new ideas or business leads?

It may sound overly simple, but the ultimate goal should be to work with good people who you can trust. If you have a good idea or product, bring an attitude of confidence and optimism to each interaction — because if you’re right, you will likely get funded. Be forthright and candid, and remember that you’re evaluating the potential investors just as much as they are evaluating an investment in you.

Remember that the investors you partner with will be your mentors in the VC world. Please make sure they are worthy of serving that role in your journey.

Proven Ability to Scale

The VC phase of investing and growing a company is all about scaling. By the time a company is ready for VC, they have a product and a good idea of market fit. The right investors should excel at helping you validate your market fit, sell it at scale, and build an efficient operation capable of driving growth while controlling costs.

Several key indicators point to an investor being able to drive scale. First, they should have a proven track record of scaling related products or services. Clout within relevant circles or markets is another good indicator, as it’s important that your VC investor will be able to open doors that were previously inaccessible to your company.

Vision is key for scaling, and the ability to envision and articulate a detailed path forward for your project is another essential trait for investors to have. They should be able to see around the corner and help you navigate challenges you haven’t considered yet.

There are so many pieces to the puzzle between startup and unicorn — investment, real estate, debt, taxes, regulatory concerns, and more — so it’s crucial to partner with an investor who can see all of the pieces on the board.

Willingness to Preserve Owner Equity

Investors take risks on emerging technologies to make a profit, but ROI should not be their sole motivator. In addition to turning a profit, the VCs you want to work with will be vested in your best interests as an entrepreneur and as a human being. They should be pulling for you to succeed, and investors with your best interests in mind realize that preserving owner/founder equity is a crucial part of your journey.

If an investor pushes aggressive terms or demands a too-high ownership stake for their partnership, entrepreneurs would be wise to take a step back and look at the big picture. Chances are, they can find a better deal elsewhere.

It’s Not Just About the Money

It’s true that you’ll need funds to keep the lights on until you make it, but what successful entrepreneurs are really looking for is true partnership. So focus on the investors, both as professionals and as human beings, and understand that the funding is secondary to finding the right investor to provide it.

If your company is coming to the crossroads where it’s right for VC, I can tell you that there will be a ton of distractions. The best advice I can give you is to ignore the noise, focus on your objective of finding the right partner, and pursue that partnership relentlessly until it’s in place.

I’m the founder of Cape Fear Ventures and a three-time successful entrepreneur. I’m looking for opportunities to invest in high-potential early-stage technologies.

If you’re an entrepreneur with a tech project that might be a good fit for Cape Fear Ventures, feel free to contact me through LinkedIn. Likewise, if you’re looking to invest in AI or emerging technologies but aren’t sure where to start, please reach out. I’m looking for new investors, and I would like to learn more about your background and investment interests.