Screening for a VC Match When Startup Fundraising

Fundraising for your startup always seems high stakes and stressful, especially for first-time entrepreneurs learning the ropes and rules of the game. One key concept is to realize that potential VC investors come in many varieties, and finding the right match is critical to success.

For a startup team, fundraising is securing the lifeblood needed to keep going and building value in a startup. We focus on defining and refining our story, securing referrals and potential meetings, and applying for potential pitch events. Yet, while these activities are unquestionably essential, they are also focused on the point of view of the startup – the startup’s story, what the startup team can control, and so on.

However, what more experienced startup leaders know is that the key to successful venture capital fundraising is also about finding the right match between possible investors and the startup. This match-making exercise requires learning about the potential investors and their needs and filtering your focus toward those who most likely are a good fit. All the time and energy spent chasing investors who are the wrong fit is wasted time for everyone involved.

Keep in mind that venture capital investors vary. They have different areas of focus, different investment theses, different investment size targets, different timing expectations, different sources of funds, different perspectives on co-investors, and many other factors. These factors influence what they will find interesting as a potential investment – and where they will focus their time and attention.

The reason for screening for fit when seeking to raise money from VCs is because VCs are constrained about what kinds of opportunities they can invest in by how they raise the money in their fund. When VCs raise money from their limited partners for a particular venture fund, they do so based on a stated investment thesis which typically defines industries, startup stage, and usually a host of other defining points of view that, combined with the VC team’s experience, give potential limited partners the ability to assess whether this is an area of interest and whether they are convinced this team of VCs has the right expertise to make smart investment decisions. Once VCs have committed to their limited partners about what they are looking for, they need to be able to justify any significant deviations to those same investors. Too many exception justifications erode limited partners’ trust in the VCs and will make it more difficult for those VCs to raise money for their future funds. Since a significant component of the investment thesis is related to the expertise of a venture firm’s general partners, typically, although not always, there will be some common themes across funds raised by any given VC fund.

Venture firms facilitate startup fundraisers’ screening processes by sharing information on the high-level investment theses for their venture fund on the VC’s website. As a first step, it is worthwhile to investigate to see if there is any chance your startup fits within what they state they are looking for (often under categories like approach, focus areas, portfolio, and even the home page).  

Here are some tips on how I think about these dimensions when screening for potential matches, typically by reviewing information on the venture capital fund’s website:

Targeted Startup Industries

As a first-level screen, focus on investors interested in your industry. Healthcare startups should be targeting healthcare investors. Cleantech startups should be targeting cleantech investors. Agtech startups should be targeting agtech investors. And so on. Given that VC partners have specific areas of expertise, rare is the venture capital firm with no preferences or limitations regarding their industry areas of interest. Reviewing articles on venture investing trends is an easy way to become familiar with how venture investors define their foci. (Note that small regional funds, university-affiliated funds, and angel groups may be much less restrictive in their industry areas of interest.)

Areas of Focus/Special Requirements/Limitations

Within each major industry vertical, say healthcare, there are often specific focus areas. For example, VCs investing in healthcare often clearly delineate on their website if they are interested in therapeutics, medical devices, healthcare IT, or all of the above. Many VCs will strictly limit their scope of investments to only some of these types of startups. Some VCs with bigger funds may take a broader view of an industry, while others may play purely in one sub-sector. This holds true in other industries as well.

Beyond specific industry sub-sectors, some funds will have other specific requirements or limitations. These can be geographic (e.g., Midwest or Ohio-based startups), an affiliation with specific universities or strategic companies, a focus on particular types of founder/startup leaders (e.g., women, diverse, or other underrepresented groups), or anything else the VC has dreamed up. Most importantly, if they have a declared specialty, it is generally wise to keep it in mind when deciding whether to invest time connecting with that particular fund.

Startup Stage Targets

Venture investors usually have specific stages of company development that they like to focus on – and it is essential to pay attention to what stage each venture fund is focused on. Probably the most significant inflection point is between pre-revenue and commercial-stage startups because there are distinctly different relevant risks between those stages of development.

By the way, there are various ways to “stage” startups, so pay attention to stage characteristics that the VC firm shares on its website to try to determine if you will fit or not. For example, early-stage/Seed/Series A investors are willing to take the risk of looking at startups that have a concept, are developing their product, and are doing initial commercial launch to prove their product-market fit. Growth/Series B/C investors are looking for revenue-stage startups that are ready to scale commercially. Late-stage/Series D+ investors are looking for more mature companies. Sometimes a venture firm will have multiple funds targeting different stages.    

Investment Size Targets

I have often had conversations with startup teams who are looking to raise <$1M and are targeting big VCs. This is almost always a fruitless exercise, although there is occasionally the possibility of VCs asking the question of what would you do with more money – and the startup having a compelling answer.

Another important fit driver is the fund size and the corresponding amount they are targeting for first and follow-on investments per company. To find a good match, you are looking for alignment between what you expect to need to raise throughout your startup’s development, what portion of your raises (remember you are likely to be raising from syndicates of multiple investors in each round) you anticipate each investor will contribute, and what the fund is looking to invest over the life of a company.

So when looking for a fit based on a website review, as a rough estimate, most funds will look to invest their fund in 12-15 companies, which means you can approximate what amounts they are looking to invest. So, a VC with a $100M fund will intend to invest $6-$8M in each company, usually with less than 50% of that amount for an initial investment. In contrast, a $1B fund is likely to be looking to invest maybe $50M per company. The implication is that for a particular round, if you are trying to raise less than $10M, talking to funds that are $500M or more is likely fruitless because their target investment size will dwarf what you are trying to raise and it is not worth their time to complete due diligence for such a relatively small investment. On the other hand, if you are looking to raise just a few million, you may be well advised to target angel groups or smaller <$100M VC funds whose target investment size maps well to your target raise.

Portfolio Companies

Another way to refine your fit assessment is to scan the companies already in a VCs’ portfolio. If you see a direct competitor, you may want to steer clear as most VCs will not make the same “bet” multiple times, although adjacencies and themes are undoubtedly common. Checking out how they categorize their portfolio can provide insights into how they think about the different types of opportunities they are seeking. A look at the short portfolio company descriptions will also often give you a better sense of what they mean when they abstractly describe categories.

Backgrounds of Venture Capitalist Partners

Different venture funds have different strengths that they try to leverage, which is often reflected in the skillsets they have assembled into their partnership. Some VCs are generalists or emphasize strong financial and dealmaking skills. Some are highly clinical, and many of the partners will have medical backgrounds. Some will be highly technical, and many partners will have PhDs or other deep technical backgrounds. Depending on the nature of your startup and its technology, once you have done some broad brushstroke screening according to the dimensions above, as a next layer down, it can be beneficial to read the bios of the managing and general partners to see what kinds of backgrounds they have. Sometimes this can give you a clue if this group will feel comfortable evaluating your type of technology. It can also highlight who in particular you might want to reach out to based on the alignment of their background with your opportunity.

Final Thoughts

Always remember that there is more nuance to every one of these dimensions than the venture capital firm will spell out on its website. So, if you are close, it is worth seeking a warm introduction and having an exploratory conversation. Remember, a motivated VC can sometimes stretch their on-website declarations a limited amount for an investment opportunity on the edges of their sweet spot. A dialog can also allow you to learn some of the crucial aspects that influence fit that will seldom be disclosed on their website, such as where the fund is in its process of raising and deploying capital, how big a fund they are currently investing out of, if a new fund is on the horizon, and any new directions they are starting to explore. Screen for fit to avoid wasting everyone’s time, but make sure you explore the fuzzy edges along the way!

Suggestion:  If you are thinking about startup fundraising, note that I have many posts on various aspects of the process under the “Fundraising” category at www.StartupCEOReflections.com.