Tom Evslin has started a great series called "VC Primer from an Entrepreneur's POV" with an awesome post about "Source of Funds". It is refreshing to see this from an entrepreneur's point of view. I generally agree with most of the points he has written about. There are several points that could be whole posts on their own and I hope he takes the time to address them. I have written about a few of these points in my nascent series "VC Primer". As I alluded to previously in my post, "Fundraising and Blue Sky Laws" - it is important to know who the VCs are and what their VC lineage may be.
Tom brings up excellent points about the necessity to really get your finger on the pulse of the VC firm and to discover any intra-firm dynamics that might affect how the VC will behave in the investment. Some more subtle points that he hasn't mentioned include:
-Knowing how the various partners of the firm are compensated, not just the management fees and carry from the fund, but how these are distributed to the fund partners and associates. I have posted on this in Partnership Compensation. In general you want to have someone who is motivated, forward-thinking, and enthusiastic about your investment. In some cases this might be the younger partner/associate who would like to make a name for himself and who will work overtime to help your business succeed, versus the more established partner who may be out playing golf half the time. Similarly, you need to know who in the firm really can add value through their experience and connections.
-Knowing about the fund and other portfolio companies. Tom touches on this issue a bit, but in general you want to know the characteristics of the fund that is investing. How big is it? What are the other investments like in terms of size, stage, maturity, and likelihood of success? VC's are risk takers but also like to hedge their bets and roughly estimate which companies in their funds will need further resources. If you are taking money from a fund that has several other self-sustaining winners, then you are golden. If your other portfolio brethren are draining cash away from the mother ship fund, then know that the hand that feeds you might someday turn you away.
-Know about the other funds within the firm. There are many dynamics that can create conflict within a firm's funds. I have written briefly about this before here. This somewhat overlaps to previous issues, but in general if you are in a fund that needs to make money because it is new or the firm is coming off a bad fund, this will dictate how the partners treat the investment. They may have learned their lesson from their last fund and be quick to shut off the money pipe, or they may be more patient this time around. If you know that their previous funds were winner and losers and you can figure out why, then you will know what types of companies the VC does the best with, and this can help guide whether to take funding. Remember, it is not just about money.
I have plenty more to say on this issue and hopefully through Tom's new series we will have plenty to discuss.
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