This article first appeared on Biotech Likemind’s blog, and is republished with permission.
The search for the right partner
During the fundraising process, the first thing on an entrepreneur’s mind is making sure that one gets the best deal possible, ideally obtaining a high valuation and sufficient capital for growth. However, is that all there is? The relationship with a VC should be a true partnership, one that spans 5 to 7 years. Hence, it is important that the VC provides much more than capital – there are many aspects that the entrepreneur can leverage on. On the flip side, the VC often sits on the board and closely monitors the company. The voting and veto rights that a VC will have means that the VC can make sudden corporate changes in the interest of its investment, a move which is not necessarily aligned in the interest of the entrepreneur. Because of the nature of this long partnership, it would be beneficial if the VC provides much more than money. Below are some traits that the entrepreneur should look out for, when selecting the right VC.
Ideal traits in a VC
-
The Value-added VC
The term “Smart money” has been coined to refer to capital that provides value added features that the entrepreneur can leverage. These come in many forms, to aide all aspects of the company. The VC can mentor and provide strategic business advice and technical advice, and help with financial expertise for next round financing. They can also act as an additional pair of eyes and ears, to keep a lookout for external factors that impact the company’s wellbeing, including industry trends, opportunities, competition, and regulatory changes. The breadth and depth of a VC’s network can also be leveraged to obtain introductions to potential customers, partners, consultants, or even buyers for the company when an exit is planned.
-
The Reputable VC
Reputation counts in this industry, because a VC who has treated an entrepreneur unfairly, would be effectively poisoning its own deal flow. Look for a VC which has a track record in successful exits, and plays an active role in helping companies grow and troubleshoot.
-
The Deep-pocket VC
As a company grows, so does its requirements for capital. The entrepreneur should look for an investor who is able to continue committing to the company as it expands, and hence follow-on capabilities should be a priority. If a VC who has invested in a previous round does not invest in the next round, it sends a red flag to other investors that the company could have an undisclosed problem – even if the real reason is that the VC has reached the end of life for its fund! This could raise too many questions, and have a negative impact on future fundraising rounds. A well-syndicated VC could be a solution to this problem – the financing round will just require more investors to chip in smaller amounts.
-
The Personal VC
The relationship between the company and the VC firm is ultimately defined by the personal interpersonal relationship between the entrepreneur and the VC. Given the close nature of the interactions with difficult challenges and decisions faced by the entrepreneur, the rapport and chemistry, as well as how much respect the individuals have for each other, can be a strong positive indication for a good match between company and VC.
How should the entrepreneur pick the best match?
Analogous to how the VC puts each deal through its due diligence process, the entrepreneur should also return the favor and perform a similarly detailed due diligence on the VC. Check up on the backgrounds of the individual partners in the VC firm, especially the one who is the deal champion, and verify their track records – many of these VCs are stellar networkers and have current LinkedIn accounts. Call up individuals who have personally worked with the VCs before, including service professionals such as attorneys and accountants. Obtain firsthand accounts from entrepreneurs who have pitched to the VCs, or are/were portfolio companies of the VC’s fund, including both successes and failures. A transparent VC should be able to produce references when requested – it will make them more assured that the entrepreneur is clear about what they want from the deal.