Whether a startup’s initial Seed round is comprised of individual angels, seed-focused funds, larger VCs , or some combination of the three, when it’s time for the entrepreneur to raise a true Series A round, of course the goal is run a process to “optimize” it. You can find quite a bit of advice in the blogosphere about how to optimize around the most salient dimension: valuation. And savvy entrepreneurs realize that terms are just as important (and even sometime more so) than just the one figure of valuation. An entrepreneur’s take on a variety of exit outcomes can differ dramatically depending on terms, not infrequently even more than small changes in valuation of a specific round.
But the one dimension to optimize around which I rarely see discussed (and followed) is VC firm partnership buy-in. The buy-in issue can come up with regards to “signaling” for when a VC participates in a Seed round (… will they step up to lead a Series A?), but with a Series A itself it is much more acute for two reasons. First, it’s different because when nearly any venture partnership invests >$1M into a startup, they begin to treat it as a full investment by explicitly internally reserving additional future capital for it. Second, unless the company is a truly break-out win that supports an entirely new venture firm coming in to buy an additional 20% in the Series B, (in this current market especially) Series B rounds are quite frequently done by insiders even when the startup is progressing. Especially if the Series A was competitive and pushed to a high price, there will be increased skepticism within a partnership about further supporting the company with an inside round if things didn’t transpire exactly as planned. Given the dynamics of significant potential for an inside-led Series B, an entrepreneur ideally wants to have as much Series A partnership buy-in that his startup is worth supporting for the long haul.
This issue matters more in a larger partnership, as diffusion of responsibility of who leads an investment becomes more dispersed and placed solely on the shoulders of one specific partner. Generally-speaking, small partnerships hash out a potential investment together, whereas large partnerships assign responsibility to an individual even though they make “partnership decisions.” But even among large partnerships there is a gradation, where some firms operate as a conglomerate of Lone Rangers and some are more collaborative in nature. The typical advice is to address this issue is to target a senior partner (with the most influence in the firm) to lead the round and avoid junior partners. However, I think this route is misguided both because it doesn’t take into account that a senior partner may not be the most appropriate person to join your company’s board and there are sometimes otherwise internal political waves within a firm that aren’t visible to an entrepreneur that will affect a specific portfolio company’s stature and perception within it.
The solution to the buy-in problem is to spend as much time with multiple partners throughout the fundraising process and afterwards. While a shorter fundraising process is better from a timeframe and deal heat perspective, it’s better for an entrepreneur for that process to be comprehensive as possible. You want your VC to really dig in and understand the business – and fully socialize with the entire firm. If the firm has multiple offices, my recommendation would be to just happen to find yourself in NYC/Bay Area/Boston/London and meet with another partner to share the story. Pitching your startup in person is always better than over a video-screen. If an investor misses hearing the story during a partner meeting but things are proceeding anyway, (at least meaningfully offer) spend the time to catch that missing partner up to speed. The goal is to be as exhaustive as possible within reason for everyone in the firm to fall in love with your company, not just the partner who is leading the investment. Then, assuming you have more than one Series A funding option, take the partnership buy-in dimension into account when selecting a firm in addition to valuation and terms.
And the buy-in process doesn’t end after the investment has been made – it’s the old idiom about always be selling. Make yourself known occasionally around the VC’s offices after the investment has been closed by borrowing a conference room for a client meeting or executive offsite. If you’re invited to present at the annual LP meeting (which is a good signal), spend time schmoozing with the growth equity team or the clean-tech side of the house. Out-of-sight is out of mind, and in a larger partnership the intangibles of perception and buy-in really do count. The more that you do to socialize yourself within a partnership after a Series A, on the margin (holding performance constant) the more likelihood the firm will step up to support on the Series B even without a new outside lead. But remember, at the end of the day, it’s the company performance matters most.