Jun 10, 2023

TechnoHoop Contributor Blair Silverberg is co-founder and CEO of Hum Capital, a financial services company using technology to accelerate the fundraising process. More posts by this contributor Redefining ‘founder-friendly’ capital in the post-FTX era The right questions to ask investors when fundraising in a down market There’s tons of advice out there about how to approach venture capitalists for startup fundraising, but in my experience as both a former VC and current founder, I’ve found there is no one-size-fits-all method. Venture capital investors get into the industry for many different reasons and come from a wide variety of backgrounds that shape their perspectives on the companies they consider for investments. Founders must understand which kind of VC investor they’re dealing with to have the best shot at closing a funding round. Here are the four personas of venture capital investors, and what founders can do to partner with them: #1: The follower It’s incredibly difficult to predict which companies will be big winners in the long run, and for early-career investors, getting your first 3-5 investment bets wrong can limit your future career prospects. That’s why investors in the follower category care that other credible brands are investing alongside them: latching onto big name interest can help de-risk high-pressure investment decisions. This is the VC version of, “you don’t get fired for buying IBM.” These investors will never go out on a limb to fund something solely based on its thesis or early business metrics. When you dig into their portfolios, you’ll see followers rarely lead funding rounds and are investing alongside brand name investors 95% of the time. If they do lead an investment, the company is usually led by a well-known repeat founder or a close friend, or the company has already raised 2-3 financing rounds from blue chip investors, which makes leading a Series C+ feel safe. Founders must understand which kind of VC investor they’re dealing with to have the best shot at closing a funding round. This is the most common type of VC persona, and the trend-following approach can be quite successful. In fact, there is a whole discipline of public market quant investing called “trend following” that has made this strategy systematic. Despite its strong academic validation as an investment strategy, nobody likes to be called a “follower” and because of this, followers will almost never admit to being followers. For founders approaching this type of investor, it’s critical to get one of the other three types of VCs on board before reaching out. With that investor’s term sheet in hand, you can then syndicate your round to one or more followers. #2: The academic Investors in the academic category have clear theses and do not stray from them. They deeply understand your company’s space and have the knowledge and network needed to conduct due diligence on the business. Academic investors can become extraordinarily valuable thought partners and almost feel like co-founders in how they help you build on your thesis. Academics are leaders. At the early stage, they are often the first investors or lead rounds largely by themselves. At later stages, they are not afraid to invest at inflection points and often catalyze turnarounds. This information is more difficult to see publicly but easy to detect in conversations. If you suspect an investor may be an academic, ask them what investment theses they’re working on. If the answer sounds vague, they are a follower or a feeler. If it sounds highly specific, they’re an academic. For example, if you hear, “we’re really interested in how AI may be applied to vertical software,” they are a follower or feeler. If, instead, you hear something that sounds highly specific and even a bit confusing like, “I’ve met every neural chip company to launch over the past seven years and am convinced that analog chips are the only way to apply AI inference at the edge,” they are an academic. Source link