If you’re running a start-up that’s getting traction, you’re probably somewhere on the capital raising cycle (although there are notable exceptions to this).
You might have a bit of angst about the amount of runway you have left before you miss a pay run, and how much time and energy the process is going to take away from you.
When you’re under pressure like this, and you come across an investor or Venture Capitalist that looks like they might fund you, they can seem like a guardian angel. It can be very tempting to take their advice as gospel and take their money without looking around for other options. A bird in the hand is worth two in the bush, right?
On the flipside, in the current market you might find that you hardly start the process, and you have three term sheets in front of you. Suddenly you have a very difficult decision – which one do you choose?
There is no correct set of things you need to look for in a perfect VC, as they are all different and will have their strengths and weaknesses in your vertical. However, there are a few things you could look out for to avoid bad the ones.
Be wary of PR machines painting rosy pictures. Several well-known incubators, VC’s, funders, and investors in New Zealand have sub-stellar reputations in the wider industry. In a large part, this is because New Zealand is quite small with very shallow and immature capital markets, and in general we’ve seen this getting better over time.
Get advice from other founders, investors (even if they pass on you – especially if they pass on you) and others connected to the industry.
Don’t give away too much equity for too little. This can be dressed up in a lot of ways, for example, as equity in exchange for incubator fees. If something seems funny, get some advice from a few different people.
Don’t give away too much equity in a single round. We’ve seen start-ups give away up to 50% in a single round. Thankfully, it’s not as common anymore as New Zealand has matured, but we still see it. If you want to raise future rounds, it’s going to be pretty hard when the founders have almost no equity left.
Raise at the right value. There’s a lot of easy money going around at the moment – think about whether you need to raise less than you’re offered. Don’t set the bar too high for the follow-on rounds – investors might be pissed if you have to raise at a lower value than they bought in at, and you won’t feel great either.
Skills and experience
This is especially important if you’re in a highly technical vertical, like bioscience or crypto. All VC’s have their skill base, along with investment committees and the collective skills of their wider networks.
Make sure you sign up with someone who really understands your product and has complementary skills to help you scale.
This is more important than skills and experience but harder to gauge. Everyone will tell you they’re the most well-networked investor, and on the strength of their networks you’ll make it big.
A lot of this ties into reputation. Sure, the VC may know everyone, but this doesn’t help if everyone thinks the VC is a shark.
There are two areas you should think about – local connectivity, and international networks.
New Zealand is a village, and the VC ecosystem here is small. If you need to raise capital locally again, or tap into local networks for other reasons, you want to be aligned with the right people. Think about the ability of the VC you’re choosing to participate in follow-on rounds, and if they could drive other, more valuable investors away.
This is by far the hardest to measure, unless you have your own international networks that can help you with due diligence. Everyone has been to the United States or know people at Stanford, a16z or [insert famous VC/institution]. Not all these ‘connections’ are worth their salt.
Ask around, look on Google, get a good sense for who you’re getting into bed with. But understand that you’ll be under time pressure and won’t have perfect information.
Do the best due diligence you can, but more importantly, trust your gut.
If you need any advice on who to approach for raising capital or on a term sheet you’ve been offered, we’d be happy to have a chat about your situation.