Too Early. Too Late. Finding the VC Fund Timing Sweet Spot.

When raising venture capital, understand the venture fund timing sweet spot so you can align your startup’s needs with your potential investor’s needs, or at least realize when it will be hard to fit.

“I’m sorry, Jen. You are just a bit too late for our fund.” That was baffling! Less than 18 months earlier, the same venture capitalist (VC) had told me we were too early. We had made steady progress, but we certainly had not leapfrogged over a whole stage of startup development. What was going on?

Startup fundraising is full of mysteries. One that took me a while to understand was the conundrum of being told I was “too early” and then a short while later “too late” by the same VC.  While I am not and never have been a VC, I have certainly engaged many of them in my journey as a fundraising venture-backed entrepreneur. So let me tell you what I have observed about the VC’s world from an outside perspective.

Remember that VCs invest other people’s money. That means that they fundraise also. In general, VCs spend months to years to raise venture capital funds of various sizes ranging from a few million to hundreds of millions to billions of dollars. Regardless of fund size, funds are typically structured to have a 10-year life and to invest in 10 to 20 portfolio companies to achieve a nice balance of diversification, concentration, and manageability.

The expectation is that the VCs will deploy the capital raised over the first three to four years, make some follow-on investments as their portfolio companies build value, and then start harvesting returns in the second half of the 10-year life. VCs will have raised their fund with a declared fund thesis and a few guiding principles that their limited partners will have bought into, and those factors will constrain the VC’s areas of interest.

When meeting with a VC for the first time, I like to take them up on their offer to introduce me to their fund. This is often my best chance to get behind the curtain of their website and get a sense of where VCs actually are in their current fund lifecycle.  Listen for facts like when the VCs raised their current fund, how many portfolio companies they expect to invest in from this fund and how many investments they have already made, and when they plan to start raising their next fund. Then consider:

• Are they actively fundraising?  If they are, and especially if they are just starting to raise their next fund, then they are likely putting little energy into deploying capital and are talking to you just to keep their finger on the pulse of the deal flow. Remember that serious due diligence and closing an investment requires lots of time and energy, which is competing with their fundraising efforts. It is also helpful for a fundraising VC to be able to mention that just last week, they talked to this remarkable company that is doing XYZ that aligns with their fund thesis. In this situation, if you are lucky, then maybe, just maybe, the stars will align between the timing of the closing of their fund, their capacity to conduct due diligence and close a deal, and your fundraising timeline. But it is more likely that this is a waste of your precious time.
  
  
• Are they early in their fund deployment phase?  VCs who have just closed a new fund and are starting to deploy their capital are often willing to take a bit more risk and invest in a company who is at the “early” end of their preferred stage range since there is more runway in their fund lifecycle before they need to show returns. You may be “too late” for these VCs if you are on a path to exit in eighteen months.
  
  
• Are they late in their fund deployment phase?  You can guess this depending on when they say they raised their fund.  They are likely late if they are maybe 4 to 5 years into the fund’s life or, expressed another way, investing in just a couple more companies. If they are late, they are likely looking for investments that are “mature” relative to their target stage and are scaling quickly toward an exit in a shorter timeframe.  Think of it this way:  If they invest in a company in Year 5 of their fund, they want to see a path to achieve an exit in three years or less to meet the demands of their fund lifecycle.  If you are that company, then you have a timing match.  If you are going to need five years plus of value-building, you are “too early.”
  

So the venture fund timing sweet spot depends on how well the timing of where you are in the stages of developing your startup aligns with where the venture capitalist is in their fund lifecycle.  Like other parts of venture fundraising, this is one of many dimensions in a complex matching game. When raising venture capital, it helps to be cognizant of some of the pressures that affect VC decision-making, so you are in a better position to understand when their feedback is about you and when, perhaps, it is actually about them.