Tuesday, December 16, 2008

How to pick a fund

Somebody has been running around the valley trying to educate entrepreneurs with ways to qualify VC funds. Now it's important to ask questions and show interest in any interview process, but here’s the problem: Asking the VC, How big is your fund? Are you investing currently? Or even the better educated, what percentage of your funds are currently committed? generally causes two reactions--
1. Why didn’t you do your homework on us before you came to pitch us? and
2. Do you think I’d be wasting my time listening to your pitch if I wasn’t actively investing?

Now #2 may not always be true because sometimes VCs hear a pitch out of courtesy to a trusted contact, or a favor to another firm, or just to get better educated. Generally the size of the fund isn’t hard to find, it's usually on the web site. The date it closed is also often mentioned--most funds have a 4-6 year investment period, so if it closed anytime in the past two years you are on safe ground.

More importantly, you should have done your homework on the partner in question, not just the fund. Does that fund do medical device, or lasers, if that’s your deal? What about the specific partner? Have they built a company or done several deals in your space? Are they likely to have deep contacts and domain expertise in it?

These are simple questions, and easy to answer just using basic web research. Leverage your service providers, especially in the Valley. Everyone from your landlord to your lawyer will know a firm or two, and most of them will know who’s investing. Your lawyers will have access to the venture databases, and can fill in the blanks on the questions above on fund size, and so forth.

There are also profiles to partners and funds. The classic profile is replace the CEO with a seasoned exec.--quite a few of the top tier firms have this systematic approach to investing. If you are particularly sensitive to this issue, you had better get over it, or don't pitch those firms.

You want to pick a VC partner who can really be a partner, someone you can build a trusted relationship with and ideally become lifelong friends with. There are a lot of entrepreneurs (and VCs) that are about as sincere as the IRS in trying to “help you.” I’ve said before that raising money is like getting married, so the insincere entrepreur or VC is to be avoided. It takes time to build a lasting relationship, and to build trust. The adversarial approach doesn’t help here, i.e. some VCs expect you to beg for money (and I admit I was always a bit cap in hand when raising capital--it always amazed me that someone would give you millions of dollars to fund just an idea). And on the entrepreneur side, we are looking at all offers and we’ll pick the best one. I don’t want to be part of a competitive bidding process to find a partner (investment or otherwise) I want to invest in things where I can add unique value, and with companies who can create unique value. If valuation is the only metric for fund selection then entrepreneurs should go first to a credit card, then friends and family, then a bank, then high net worths, then angels, but frankly never to VCs.

What’s harder is to guage the spirit of each firm--ideally, you want to talk to entrepreneurs who have taken $ from this fund, especially from the particular partner you are interested in. This is another reason why CEO forums/networks are so powerful, because it provides a great resource to qualify VCs in addition to giving a self help group for first-time CEOs. Fortunately, we have a great benefit from the carnage of the tech bust--because we have a four-year historical perspective on what the VC funds actually did to support their companies during this time vs. what they said they would do ;-)

Answers to questions:
Philip Crowley CEO Market Tech on your post "Picking the right VP Marketing":
Larry,I liked your comment “coming from a place that marketing was confused as marcom”. I think a lot of us in the photonics industry have seen this happen. There are many different and separate marketing functions that are required to have an effective marketing program. In larger organizations these roles, marcom, branding, product management, strategic marketing, can be filled by individuals. Of course in a start up situation this is not possible. What is really difficult is finding a single individual to fill all these roles as they are all important and in fact require different skill sets. I agree with what you pointed out that there really is no substitute for experience. My view is that marketing needs to start at the point of conception, the business plan. How large is the market? Who are the customers? What is the USP? If this information is vetted properly marketing is all about execution for a seasoned individual.

Yes, there is often a mistaken idea amoung investors that we should have a pure engineering team first, run it lean and defer bringing in the big guns in marketing and sales until the product is developed. Clearly this is partly right, but without a clear market vision even if the product gets invented it will likely be wrong….

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