How To Find Your Perfect VC

Photo: Dominik Tryba

Photo: Dominik Tryba

When raising money you are selling. Selling your concept, your business and yourself. If you’re selling an app for elite athletes your target market is athletes. If the product is encryption software for large banks, you sell to banks. Our entrepreneurs understand this – thinking about their target market - intuitively. But for some reason when it comes to raising money founders sometimes neglect doing their research.

You need to think of VCs as buyers. They have a pot of money to invest in businesses and they are shopping around for the best deal – they have very different buying habits. You need to work out exactly what you are selling (your business) and then seek out VCs who are interested in buying from you (making an investment).

How VCs work

VCs have raised money with the promise that this money will be invested in businesses that do well so their investors, called LPs (limited partners), can make a return. These VCs will generally have been through a long fundraising process where they have developed a fundraising hypothesis and sold this concept to LPs. It may look like this:

“We are investing in seed stage property tech companies in Eastern and Central Europe who are looking to exploit new investment regulations in these regions”

It may be less specific:

“We are investing at the Series A or B stage in e-commerce businesses in Asia which are looking to grow whilst serving a large emerging middle class”

These strategies will vary greatly but from the example above you can see no matter how good your proposition is, funds with these hypotheses won’t be interested unless you fall into their narrow criteria.

VC Criteria

Here are some criteria that a VC’s buying strategy may be broken down into.

Geography

Pretty self-explanatory. VCs are generally looking to invest in a specific region, but not always.

Stage

Most VC funds invest at a certain stage. These stages are different points in the business life cycle. From seed stage (the very start) through to early stage (growth) and expansion capital (growth after the product has proven its viability), you can read about this in more detail here (https://www.coxblue.com/vc-funding-stages-explained/)

Size of Investment

This is closely correlated to stage: the later the stage the larger the cheque the VCs write. Seed stage in Germany can be €350k to €700k and later stage expansion funding can be as high as €100m.

Industry

Most VCs have one or a couple of areas of expertise. An example would be Fintech, Medical Hardware, Consumer technology or Data & Analytics. The bigger VC funds like Sequoia are pretty broad whereas smaller funds often have a narrower focus. Another way of breaking this down would be selling to consumers (individual people) or enterprise (businesses).

Stage and type of funding cycle

VCs often work in a cycle. They typically have an investment period and a divestment period. In the investment period they are making investments in businesses and the divestment period is when they expect to make their returns. The timeline could be a five year investment period followed by a five year divestment period.

This one is very important; here’s why:

If a VC is early in its investment period it has a wider remit; the VC has promised its LPs a number of investments so if you get in early you can tick any number of its investment boxes. As the investment period comes to a close it may have done most of its investing and is searching for a hard to tick last box. Maybe it still needs an e-commerce company who specialise in fashion or a Fintech company who solve a specific international transaction problem. 

If the VC is late in its investment period (for example year four out of five) then it will need a quicker exit so that the returns are realised in its divestment period.

None of these points are good or bad but you can see that depending on the type of business you are and your strategic plan certain VCs will be a better fit.

This is great – but what do I do?

You need to map your business against the key categories I’ve mentioned above. The main ones are industry, geography, size of investment, stage of investment and stage and type of funding cycle.

So this should be quite quick; here is an example for a fictional business called Fashion Stars:

Industry: Fashion tech SaaS software selling to enterprise clients (departments stores with yearly revenues over €10m)

Geography: Europe

Size of Investment: €5m - €10m

Stage: Growth capital

Stage and type of funding cycle: Looking for a VC which is planning for a return between three and five years.

The profile of this company means they will appeal to a number of VCs. The perfect VC would be one which invests in fashion/enterprise tech, in Europe and at the growth stage. In terms of the stage the VC is at in its funding cycle a three to five year horizon is typical and would appeal to many funds. VCs that have very short or long term outlooks would be less relevant.

The hard part now is finding those VCs. Anyone that has tried to invest will tell you there are tons of these funds so narrowing them down is difficult. Some details will be on their web-site (industry, investment size and geography). Where they are in their investment cycle or what boxes they still need to tick won’t be so widely publicised so may take some digging around. All of the normal routes like networking and speaking to other entrepreneurs will help. Also if you are in a good accelerator, or already have investors, they should know their VCs well and be able to point you in the direction of VCs that match your start up.

So remember fundraising is selling, the product is your start up and you need to find a VC which wants your product. If you get that right you’ll save a lot of time and a lot of energy!