A while back, a larger fund courted one of my portfolio companies heavily. I wasn't sure if this firm was the best partner for the company, so I reached out to an experienced founder who had been through lots of rounds as both an entrepreneur and an angel investor.
He told me the following:
There are maybe two or three VCs on the face of the earth that add any value to the eventual outcome of a company, so there's really just a few criteria that matter...
- They should do no harm.
- They should be able to close the round quickly and without too much distraction.
- You should like them enough to have them on your board.
- They should hit your bogey in terms of price.
He said if you could check off all four of those boxes, you should just do the deal and move on. I was so surprised because he had taken money from investors who had a tremendous reputation for adding value to their companies.
When you look at venture returns, however, the reality in most circumstances is that you're either in the big deal or you're not. If you're in a billion dollar outcome, it overshadows anything else you do as an investor.
Sometimes, the "best" firms are in the best deals, but often times, they're not, or they're joined by a lot of randos. That top tier VC firm might be the lead on the Series A for unicorn you've heard of, but the seed round might be filled with lots of other firms who don't do squat for their companies--except take credit for their success.
Sometimes, firms get into deals not because they're highly sought after--but because the team pivoted several times. Dumb luck dictates that the firm who got the deal just happened to be the eighth firm down the list for a pitch after the game-changing pivot. The first seven firms--the ones the entrepreneur really wanted, got the first business model pitch--the one that didn't have a chance of working out.
Way to go, 8th best seed fund!
Other than having the guts to keep writing checks, it's not clear that any VC has ever done anything to enable a company to get to a billion dollar plus exit where the entrepreneur couldn't have done it with any other check writer. Don't get me wrong--writing checks in the face of uncertainty, especially when you're basically the only one doing it, is a very difficult thing to do, but most VCs portray themselves to be doing a lot more than that, including me.
I know that I do a lot of things to help my companies--but I also know that the founding team is responsible for 99.999% of the outcome. If I didn't help them make that developer hire, would they have made one on their own? Sure. If I didn't get them some PR, could they have gotten it anyway? Probably.
Do I know how to do this any other way?
Like tigers with tuna fish sandwiches, I suppose I'm kind of stupid that way. I certainly ask myself whether it matters that I take the time to meet with my companies every four weeks, when others just say "Let me know when you need me."
And the best ones certainly are there when you call them--so why not just leave it at that and be an open phone line?
a) I just don't know how to work any other way. I don't like idely sitting by. I'm always trying--and I know I would have been better off with more feedback as an entrepreneur. Would I have had a billion dollar exit with the world's greatest investor behind me? No. I probably still would have failed, but I would have gotten a lot closer to success.
b) On the margin, when you're dealing with a sub-$20mm fund, it can matter. When you've got hundreds of million dollars of investors behind you, it only matters if you're in a unicorn or not. With a small fund, turning a couple of zeros into break evens, and helping a small win become a bigger one do make a difference. That's why I'd encourage entrepreneurs to think about the fund size of the folks who back you. The bigger their fund, the more they're just going to encourage you to raise lots of money to go big or go home. The smaller the fund, the more likely they'll focus you on the little things that add up incrementally, because it adds up for them, too.
c) Starting a company is the hardest thing you'll ever do (maybe besides having a kid), and the least I can do is make you feel like I've got your back and I'm there with you along the way. If not feeling alone gives you any comfort, I'm doing my job.
It will probably be eight to ten years before what I do now for companies ever sees the light of day, before we find out whether or was all worth it, but I'll stay the path regardless.