How To "Hire" The Right Venture Capitalist
Not long ago, the top concern for founder teams was, “Will we be able to raise?”
Today, that is no longer the case. Thanks to an unprecedented flow of capital, talented entrepreneurs have no shortage of suitors eager to support their visions. Crunchbase estimates that investors put $214 billion into 22,700 ventures in 2017. To put that into context, deal volume last year was up just shy of 4 percent over 2016, but dollar volume increased by nearly a quarter – in other words, more money is chasing fewer deals.
The same macro trends are also pronounced in seed and early-stage investing. Between Q4 2016 and Q4 2017, the average round size of seed-angel deals increased from $890,000 to $1.45 million. During the same period, average early-stage round sizes skyrocketed from $9.3 million to $13 million. It goes without saying that it’s a great time to be raising money as a founder!
As capital becomes commoditized, however, founders need to evolve their fundraising approach. The key question to ask now is, “Will we able to raise from the right investors?” Here’s how to determine who’s right for you.
Hire a VC who is happy to just write a check
Historically, the venture capital model has been to combine money with experience and expertise. But not every founder needs or wants a helpful hand. Sometimes you just need cash and for VCs to get out of your way.
Founders who already have a complete team in place and minimal risk in their business really only need gas to add to the fire, not necessarily someone to help them put out fires. In this case, the best VC to “hire” is the one who offers the most favorable terms aka the cheap money. You can then bring on people for their experience and expertise later when you really need it.
While this may be a bit of a blow to a VC’s ego, good VCs know it’s possible to smother a startup to death by wanting to be helpful when it’s not needed. Writing a check and taking a hands-off approach work best for the founder and the VC in these situations.
Hire a VC for their experience and expertise
On the other hand, for founders leading a risky startup who have expertise gaps in their leadership team and generally need help, the right investor fits a different mold. In your situation, it’s more about “hiring” VCs than taking money from them.
The traditional startup model is to take in venture capital and dedicate a portion of those funds to hiring people with experience and expertise. However, in this case, the model that is better suited for your business is to bring on expertise and experience by bundling it with VC money.
The cost of this expertise is equity in your company, which is obviously not cheap. But while you might pay consultants for their insights on the cap table with equity, one of the beautiful things about venture capital is that you hire a VC and they give you money. It’s the only hire where that happens!
To determine the right VC, consider how much help you need and amortize that over the life of the expected investment. While these investments can be more expensive since the VC will need to play a more active role and leverage more of their operational and industry expertise, experience and network, your decision will pay off in the long run.
Bundle dollars with help (or don’t)
Trends in VC are moving towards unbundling. We may eventually live in a world where VCs end up becoming consulting houses while efficient markets provide the capital. But for now, the bundling of dollars with experience and expertise is what makes VC work. For many founders, getting a VC on the same side of the table as you is invaluable.
But there are times when you don’t need a VC to sit at the table at all. In these instances, alignment of interests is not as crucial as capital infusion. At a time of unprecedented access to capital, founders today should have little difficulty finding the right investor based on their needs.
Sunny Dhillon is a founding partner at Signia Ventures, a $85m seed and series A venture capital firm based in the San Francisco Bay Area. He invests in consumer and enterprise startups with Signia as well as angel investing in direct-to-consumer beauty brands. He previously worked as the first business development employee at a venture backed spin-off of New Line Cinema and in corporate strategy for Warner Bros., before launching his own startup and becoming an investor. Some of his investments include Alibaba (NYSE: BABA), Tenor (acquired by Google), and Cruise Automation (acquired by GM).