What to look for in a VC

I used to think that choosing which VCs to work with was simple: pitch many, get some offers in, then choose the one that is the most well-known. My thinking was that the more recognised the VC, the better the signal to future investors, customers, and potential employees. The main thing is the money, right?

Since working with a lot of founders and a handful of VCs, I’ve learned that there’s much more to it. Brand signalling is useful, but it’s far from being everything. Here are some other factors you should take into account when choosing a firm and partner:

Does the partner have a track record: A huge strength of VCs is their access to data. They’ve seen startup journeys play out dozens of times and can spot patterns. Their job is to understand the game. They have insights on funding, commercial strategies, hiring, customer acquisition, org structure… pretty much everything. As a founder you're focussing intensely on your company, so having someone with an experienced birds-eye view is invaluable.

If they have a lot of companies that went on to more funding rounds, they'll likely have good relationships with VCs at the next stage. This means they can introduce and give references.

Look for partners that have spent a lot of time thinking about your area, and can tell you which companies they’ve seen play out a similar game before.

As a side-note, the belief that “investors don’t know about startups because they haven’t done it” is like telling a junior pro footballer that they shouldn’t listen to the manager. Their understanding of the game, and access to data is a very useful asset.

But it’s not just about length of track record, it’s also about….

Does the partner have a focus: The more focussed a partner is on a specific area, the more their data and pattern matching will be relevant and useful. This doesn’t have to be hyper-focussed (if it is their portfolio will clash), but some focus is very important.

Ask the partner about their investment theses, and where they spend their time. Do they have a chosen speciality, and are they passionate about it?

Does the firm have a focus: The more focussed the firm, the more you will have in common with the other founders. These fellow founders are an very useful as people to bounce ideas off, share solutions, and generally have your back. If you’re building a dating app, you won’t likely have much in common with a B2B robotics company, so a focussed firm is better.

Ask the partner how the firm makes investment decisions, and what they like to invest in. If they have a publicly available thesis, check it out and see how well it fits your company.

Does the firm give time to their founders: This is the inverse of the “brand recognition” benefit. I’ve spoken to a few founders that have the larger, more recognisable VCs on their cap table, and a recurring theme is that they feel a bit forgotten. The more investments a partner and firm have, the less important you are to them, and the less support you’ll get. It doesn’t matter how great the partner’s track record if they don’t have time to share what they know with you.

I don’t know exact best practice here, but at Connect we have several founder retreats each year, a lot of events, and an active Slack community. This gives founders many chances to connect with each other, which seems to be very valuable to them.

Ask the VC what they do to connect founders, and support them. Ask them how many active portfolio companies they have right now. Ask their current and former portfolio companies how helpful the partner was, especially when things got tough.

Rory Stirling, partner at Connect says "the best way to find out is just look at their volume of investments per year per partner. High volume = low time commitment". This applies to both the firm and the partner.

Would you like working with them: You don’t have to be friends, but you should enjoy the working relationship. Look for a healthy blend of “they think like me” and “they seriously challenge me”. Once they invest they become a genuine partner of yours, so act like you're choosing a co-founder. When shit hits the fan, is this a person you’d want to call upon? Do you trust that they’ll have your back when that happens?

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It’s obviously a big decision, but those are a few factors I’d recommend really thinking about when comparing VCs. Probably the most important are that you'd enjoy working with them, and they can bring strong knowledge to your business. Do reference calls with founders they’ve worked with in the past, to see if your hunches are accurate.

There are of course other factors that I haven’t mentioned here, but hopefully this will shed light on the fact that investors are way more than just brand power and money. A strong VC is an incredibly useful person to have on your side, so pick wisely.?

As always, if you're a building a company and looking for pre-seed or seed stage funding, drop me a line on here.