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October 7, 2004

Finding the Right VC

Jeff Nolan recently wrote a widely-linked post on "Picking Your VC" which brought up some very good points about the importance of the entrepreneur/VC relationship. He describes how it's not just about picking the best-known, name-brand general partner, but about working with a VC who truly shares the team's vision and can meaningfully contribute at the board level to helping the company achieve success.

"Picking" the right VC is clearly an important piece of the equation, but seems to imply that you've already found the right VCs to meet with in the first place and have the luxury of choosing among multiple competitive term sheets. I believe actually "finding" the right VCs to present to is typically the more challenging and critical piece of the fundraising equation.

The approach I've witnessed is typically "spray and pray" where entrepreneurs will speak to any and every VC that is willing to listen. Talking to a broad range of VCs is not a bad thing as many often have relevant relationships or insights that could prove helpful even when they pass on the deal. But in my experience, I see too many entrepreneurs focusing a disproportionate amount of energy on trying to get in front of Brand Name VC "X" instead of focusing on identifying the specific partner within a specific fund that is actively targeting their space.

While the style of some VCs is to be sector-agnostic generalists and simply back the best teams they come across, most VCs today tend to be highly specific in what they are looking for and even aggressively proactive in sourcing appropriate opportunities. This means that getting in front of that specific VC who is probably already actively thinking about your business is a real possibility.

I'm aware of a recent example (not involving me) where a very interesting company went out to fundraise and because their application and business model were somewhat atypical and a bit off the radar of most VCs, the majority of their initial meetings were spent educating potential investors on why they are doing what they are doing, why it's interesting, necessary, etc. While VCs will always take a meeting where there's a credible team and trusted referral, many of these meetings immediately get off on the wrong track because it's about a space the VC is not actively thinking about or pursuing.

This same company then met with one well-known VC who had been actively thinking in depth about this specific market opportunity for over a year and had many ideas and initiatives around how to capitalize on it. Now this meeting was like a match made in heaven -- the two sides were immediately speaking the same langauge, finishing each other's sentences and already plotting the long-term strategy of the comapny within two hours. From there, the company actually signed a term sheet and closed on the financing within 5 weeks from the first meeting. In the meantime, the VCs from prior meetings were likely still scratching their heads about what this company was trying to do in the first place and had no intention of trying to get to term sheet stage.

So it is important to embrace the fact that what may be incredibly interesting and engaging to one VC may be boring, way off the mark, or even incomprehensible to another. Entrepreneurs should focus maximum energy on finding that needle-in-the-haystack VC who is actually already looking from them, but just may not know it yet. The quantity of investor meetings may be smaller but the hit ratio for getting a follow-up meeting is sure to improve.

This is, of course, easier said than done. The main ingredient is to network, network, network. This is the often-stated, no-brainer tactic, but cannot be overemphasized. One of the more recent companies I invested in came about because I had been telling anyone and everyone I could about a specific technology application I thought would be valuable for a start-up to pursue. Another VC told me about this company already doing it so I tracked them down and three months later became an investor.

Also, the early trend of VC openness emerging through blogs is a great step in the right direction toward better enabling entrepreneurs to find the right VCs. While VCs are not likely to reveal specific companies they are interested in, VC blogs do convey general interest themes which should be useful hints as to who may or may not be an appropriate investor. I predict the number of VC bloggers will increase dramatically in the next couple of years as it is a highly efficient communication mechanism to generate targeted dealflow and get the word out on what areas a particular VC is tracking.

Posted by stephen at October 7, 2004 5:31 PM

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thanks for pointing to this. I have posted on this topic as well over at Always on http://www.alwayson-network.com/comments.php?id=4943_0_1_0_C

Posted by: ministeroforder Author Profile Page at October 11, 2004 7:06 PM

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