I was talking with a Sand Hill VC the other day. They do Series A deals:
“We don’t have a consensus model here. If someone on the team loves a company, we’ll do the deal. But conversely, if someone on my team really hates a deal I love, I would probably back away. As much as possible, we want to have a united front here at our firm.”
This was a really telling statement and confirmed what I’ve known all along as a VC but was clueless about when I was an entrepreneur. A few takeaways:
1. If you’re talking to a VC, you should find out how decision-making happens.
I’m not just talking about the decision-making process (although you should definitely figure that out). You should also figure out if a firm has a consensus-based decision-making model or a champion-based decision-making model.
A consensus-based model means that all partners need to agree to do a deal. If one partner dissents, then the deal is off.
In a champion-based model, if one of the partners really, really wants to do your deal, the others will let him/her.
And then there’s everything in-between: hybrid models.
Now, this is important because it says a lot about how your interactions will go with the firm as a whole. For example, at a consensus-based VC firm, you know that if they do your deal, everyone at the firm loves you and your company. All the partners will go to bat for you and will help you out. The firm is truly behind you. But, it’s very difficult to get a deal with this type of firm.
At a champion-based VC firm, it is much easier to get your deal done because you don’t need the whole investment team to agree. But, there may be a lot of contention within the investment team of that firm. Other investors at the firm may think you’re an idiot or that you’re in a small market and may not want to help you. But you won’t know who, and you won’t know why. You only know that your champion is your advocate. So, the right way to think about this is whether you would love working with the partner who is your champion rather than whether you like that VC firm.
2. Find your champion at a VC firm.
Your champion at a VC firm is going to be the person or people who interviewed you in the early stages. In order to make it to later due diligence stages, you’ll need to win over these people first so you know where they stand if you continue the conversation with the firm.
In many cases, there’s a lot of luck here. If a firm says “No” in the initial stages, it’s because you were not able to convince the initial partner to champion your deal. However, in a parallel universe, it’s possible that another partner at the firm – had you met him/her first – may have loved your deal and championed you.
Now, before you go off and try to find other investors at all the VC firms who’ve already dinged you, it’s important to understand why you were dinged in the first place. For example, if your company was considered “too early” for the firm, then meeting with someone else in the partnership will not help you find a champion. But, if the initial partner you met with thought that your market was “too small” or he/she just simply “couldn’t get excited” about your deal because he/she knows nothing about the space, then it’s possible that winning over a different person at that same firm might be more helpful. THAT SAID, in general, VC firms try to have a united front about their stance. Most organized VCs are using CRMs or other methods to track deals so that all partners know if someone at the firm has met with you before.
Trying to approach a different partner about championing you after being dinged may not help you UNLESS something SIGNIFICANT has changed between when you last met with the first partner and now. It could be a difference in traction or strategy or customer audience or product offering or whatever – but, you must have a compelling reason for someone at the firm to talk with you again.
In general, I personally find it most compelling when an entrepreneur a) owns up to the fact that he/she has already talked with others at 500 Startups but b) wants to talk with me for particular reasons pertaining to my personal, unique background. Otherwise, my belief is that if my colleagues, whom I trust, dinged you already, then there is no reason for me to take the call. Do some research here on individuals at the firm.
Whether the firm you’re talking to has a consensus-model or a champion-model, you will still need a champion. This is the person who will shepherd you through the whole fundraising process with his/her firm and will likely be working with you for years after he/she does the deal. So, make sure that you like him/her and think that he/she is useful.
3. Befriend and win over the firm
So let’s say that a champion-based VC decides to do your deal. Hurrah! Congrats! This means that you know at least one person loves you and your company. But, the other investors may be indifferent to your deal because they don’t really know you or your company. Worse yet, there may be investors who hate your deal at the same firm. Some of the best deals are the most contentious ones. If picking startups were so easy, there would not be so many failing VCs.
An extreme case where you should apply this thinking is at 500 Startups. We do SO MANY DEALS. Right now, I think we are averaging about 1 deal per weekday, worldwide, across all our funds. There is no way that I have personally met every company we’ve invested in, let alone championed. As such, I can’t just start opening up my rolodex to entrepreneurs I don’t know – even if they are portfolio founders. So, if a champion-based VC does your deal, it’s in your best interest to try to befriend other partners at the firm. Get to know them. Don’t just become Facebook or LinkedIn friends with them. It goes without saying that you definitely should NOT assume that someone championing your deal at a firm automatically means that someone more prominent at the firm is your champion. For example, if I champion your deal, you should not expect Dave McClure or Christine Tsai to love you and your company. They simply don’t know you. So, work on befriending them and winning them over as well. And, if you can do this, you can potentially get lots of different kinds of help from within the same firm.
The flip side is that if you meet with someone on the investment team who just doesn’t seem very helpful after meeting him/her a few times, either he/she is not a helpful person or you know what he/she really thinks about your deal. And that’s OK. You can’t win them all (and as you make progress in your business, you may be able to win him/her later by showing traction and progress). This is why it’s important for you to love and value working with your initial champion in case no one else at the firm is your champion.
In conclusion, even though entrepreneurs will say things like, “Oh, Sequoia is in my round,” they should really say, “Oh, Alfred Lin from Sequoia is in my round.” It’s really about working with an individual champion and in some cases, upselling into a firm to get more individual champions. VC firm dynamics are not altogether clear to entrepreneurs, and it’s important to understand how these dynamics work.