Almost every week lately I hear from teams thinking of raising a new venture fund. While that newfound ardor speaks volumes in itself, it is remarkable how people who think themselves adept at figuring out whether a potential portfolio company is worth funding are often so adrift when it comes to the “fundability” of their proposed venture fund. People babble away about relationships,willingness to hop on airplanes, and aggression, without once ever putting themselves in the position of institutional fund managers and asking, “Would I fund these would-be VCs?”
So, what does it take to get a first-time venture funded loaded up with capital? Some combination of the following:
- Proprietary deal flow
- A (good) investment track record, including at least two exits, ideally an M&A and an IPO
- Previous successful deals on which you pulled the string
- Namebrand CEOs & entrepreneurs who will vouch for your added value and usefulness
- Relationships with capital providers
- Presence & personality
- A differentiated background
- Board experience
- Proposed venture investment market sector(s) in which people are interested
- Other name VCs who have nice things to say about you
- A team of similar people
You don’t have to have all of these, but you better have most, and you better be high in at least a couple. What’s more, notice how relationships with professional service providers like lawyers and such don’t really matter that much, so don’t go telling potential investors how all the lawyers in town steer startups your way. Notice also how being deep in technology is good, but it is low on the list of things that will get capital providers jazzed.
Finally, people need a reminder on what constitutes “proprietary deal flow”. It is not that your Stanford friends will come to you first. There aren’t that many of them, and most MBAs are, de facto, not entrepreneurs anyway (why would they waste two years in school?). Nor is it that you know some serial entrepreneurs who have promised you their next deal. You need more than that, whether reputationally-driven or relationship driven, so that you’re not just another venture wannabe confusing aggression with what it takes to create a first-quartile IRR in an illiquid and unusual market.
So, how many teams like that have I heard from lately? The honest truth: Out of perhaps fifteen teams that I’ve spoken with since last August I’d say one cleared the fundability hurdle. Just one — and that’s a story for another day.