As a startup founder, one of the most critical decisions you will make is choosing the right venture capitalists (VCs) to invest in your company. The best venture capital funds will provide not only necessary funding, but also invaluable strategic advice, access to a network of industry experts, and credibility in the eyes of potential customers and partners.
However, with so many VC funds out there, it can be challenging to know where a startup founder should even begin. In this blog, we’ll outline tips that will help you find your perfect VC.
1) Define your target investor profile
Before you start your search, you should have a clear idea of the type of VC you want to work with.
Here are the main three factors a startup founder should consider when looking to approach a VC fund:
A) Industry Focus
Look for VCs that have experience in your industry or niche. They’ll have a better understanding of the market and the challenges you face, and may be more willing to take a chance on an early-stage startup in their area of expertise.
Taavet Hinrikus, founder of TransferWise, a global money transfer platform, has publicly praised Passion Capital’s sector focus as a key factor in his decision to work with the firm. Hinrikus appreciated that the Passion Capital team had a deep understanding of the Fintech industry and could provide strategic support and guidance to help his company grow and succeed.
In addition, certain VC funds raise money to be completely sector focused. This means that they can only invest into startups that match their chosen industry. For example, in Europe, there has been a growing trend for climate focused VC funds.
B) Stage focus
Different VC funds tend to specialize in different stages of the funding process. The smaller funds invest earlier, and larger funds tend to write bigger investments at the later stage for startups. However, given the competitive nature of the industry, larger VC funds have been making earlier stage investments. This has given rise to stage agnostic VC funds.
Ensure that you’re targeting VCs that are a good fit for the stage you’re currently at. It is pointless sending your pitch deck to a VC fund that only invests a minimum of £5m when you are looking to raise a £1m seed round.
C) Geographic Focus
Some VC funds are limited to a specific region. In Europe, there are several VC funds that focus on startups based in the East. These funds are unable to invest into UK based startups, as they raised money from their investors with the promise to only distribute funds into these regions.
A good example of this occurring in the UK is the Development Bank of Wales. As this institution uses public funds from the Welsh population, it only invests into startups based in Wales.
When you use FindVC to find your perfect VC investor, we allow you to search our database of venture capital funds on these three search criteria. This helps a founder discover all their relevant investors in just a few seconds.
Do your research
Once you have a clear idea of your target investor profile, the hard work can begin. To maximise your fundraising chances, we recommend that you look at the VC’s website, blog, and social media channels to get a sense of their investment philosophy, portfolio companies, and recent news.
Alex Chesterman, founder of Zoopla and Cazoo, conducted some in-depth due diligence on his potential VC investors:
“When choosing an investor, it’s important to find someone who shares your values and understands your vision. You should also look for someone who can provide strategic guidance and support to help your business grow. We spent a lot of time speaking with potential investors, getting to know them and assessing whether we felt comfortable working with them. We also looked at their track record and spoke with other founders they had invested in to understand how they worked and what value they could add.”
Network and get introductions
Given the amount of cold outreach VCs receive, some funds have created a fast track process for startups that are given a warm introduction from a mutual connection. Other funds do not publicly state a preference. You can attend industry events, such as conferences or meetups, to meet VCs in person and make new connections, however this can be slow and time consuming. I’d recommend reaching out to other founders in your network.
Alex Depledge, co-founder of Hassle.com already had a personal relationship with her future VC investor, Robin Klein of Index Ventures, prior to launching Hassle.com.
When Alex was launching Hassle.com, she reached out to Klein for advice and support. Klein ended up investing in Hassle.com’s first funding round and became a board member and advisor to the company. Their pre-existing relationship and mutual trust helped to establish a strong foundation for their working relationship and contributed to the success of Hassle.com, which was eventually acquired by Helpling in 2015.
Consider the objectives of the VC fund
Your pitch deck should be designed to match the specific investment thesis of a VC fund. Make it clear why your company is a good fit for their portfolio. This could be via demonstrating strong sector fit, or the levels of returns you are projecting for your investors.
Here are a few useful data points from Pitchbook’s’ 2021 European Venture Report for startup founders:
- Funding Round Size: According to Pitchbook, the average size of a seed funding round in Europe in 2020 was €1.6 million, while the average size of a Series A round was €7.6 million.
- Growth: The amount of growth that a VC expects to see in a startup can vary depending on the industry, stage of the company, and specific investment thesis of the VC. However, PitchBook notes that VCs are generally looking for startups that can achieve rapid growth and scale, with an eye towards achieving profitability within a reasonable time frame.
According to the same report, the median annual revenue growth rate of Series A firms was around 100%.
- Time Scale: The time scale for VC investment can vary widely depending on the stage of the company and the industry. According to PitchBook, the average holding period for a VC investment in a European company is around 5 years, but this can range from 3-10 years depending on the specific circumstances of the investment.
Consider cultural fit
Finally, don’t underestimate the importance of cultural fit. While funding and strategic advice are critical, you’ll also be working closely with your VC for years to come and these relationships are very hard to unwind.
Even if you and your VC fall out on a end of the world type scale, you have very limited recourse to change your VC investor. If they like the growth potential of your company, they can simply retain their equity ownership.
To minimise this possibility, make sure that you feel comfortable with their style of communication, decision-making, and overall approach to business. Some VC funds prefer to push their startups to grow very quickly. This allows them to identify the winners and losers in their portfolio.
Follow on capital
Startup founders should recognise that they are in competition with the other founders in their VC fund’s portfolio because they are all vying for the same pool of follow-on capital. VC funds typically invest in multiple startups within a given cohort or fund, with the expectation that they will invest additional capital in the most promising companies as they continue to grow and develop.
As a result, startups that are unable to secure follow-on funding from their VC fund may be viewed as less promising than their peers, which can signal to other VC funds that they are not worth investing in. This can create a sense of competition among the startups in a VC fund’s portfolio, as they all strive to demonstrate their potential for future growth and secure additional funding.
Two examples of successful startups that have experienced different outcomes when it comes to securing follow-on funding from their VC fund are:
1) Monzo raised a £1 million seed round in 2016 led by Passion Capital, and subsequently raised a £19.5 million Series B round in 2017 led by Thrive Capital. The company was able to secure follow-on funding from its existing investors due to its strong growth and rapid customer acquisition, with the company boasting over 500,000 users within just two years of launching.
The successful follow-on funding rounds enabled Monzo to continue growing and expanding its services, with the company now valued at over £2 billion and counting over 4 million customers. Monzo’s success in securing follow-on funding from its VC fund is a testament to the importance of building a strong relationship with investors and demonstrating clear potential for future growth and profitability.
2) Goji, a fintech startup that raised £4 million in a Series A round in 2018 led by Anthemis Group. Despite having follow-on capital available from its existing investors, Goji was unable to secure additional funding and eventually pivoted its business model away from its original focus on peer-to-peer lending.
The company’s struggles to secure follow-on funding contributed to its difficulties in scaling and growing its business, which ultimately led to its change in direction and refocusing on a new business model.
While Goji did not ultimately fail, its difficulties in securing follow-on funding from its existing investors highlight the challenges that startups can face when competing for investment within a single fund. The inability to secure additional funding can limit a company’s ability to continue growing and innovating, and can ultimately negatively impact its chances of success.
In conclusion, finding your perfect VC is a challenging but essential part of building a successful startup. By defining your target investor profile, doing your research, networking strategically, tailoring your pitch, and considering cultural fit, you’ll be well on your way to finding the right VC to help take your company to the next level.
Remember, it’s not just about securing funding, it’s about building a long-term partnership with a VC who shares your vision for the future of your company.