Ask a VC: Finding the Right VC for Your Company

jtestai /  Jul. 19, 2023

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As part of our Ask a VC blog series, we wanted to provide additional insight from the OUP investment team on how to find the right VC to fund your startup company. We spoke with Tech Managing Partner Marc Singer and our Life Science Principal Mitra Miri for their perspectives on diligencing VCs, having multiple investors in a round, and red flags to look for in a potential VC partner. While some of their insights were similar, as with all individuals in the venture capital space, they did have differing opinions. The interviewees’ statements below have been edited for clarity and length by Jaimie Testai.

What should I look for in an early-stage VC? How does that differ for a late-stage VC?

Marc: For an early-stage VC, you are looking for a deep overall partnership where you can discuss everything from product to company strategy to financing. In particular, you are going to want the firm’s help in building a team. A lot of people say you want a VC that has a great network of potential hires. That would be wonderful, but it is hard to expect the firm will know exactly the right people for you. What you want instead is their expertise in how you find the right people. How do you identify them? How do you evaluate them? How do you close them? Their skill in helping you build a team matters a lot. An early-stage VC is also your stepping stone to raising your follow-on rounds. In an ideal world, your lead VC would be well connected and can introduce you to other investors as well as bring some cache to the business for the next round. Those are the three main things to look for in an early-stage VC – a deep partnership with you, help with team building, and connections for fundraising in the future.

Mitra: If you are an academic and thinking about creating a company, you want to work with an experienced early-stage VC who is comfortable collaborating with scientific founders and knows all those nitty-gritty operational steps needed to transfer an idea out of a lab and into a company. That is very different from the lens of a later-stage VC who, on the life science side, is looking for something typically twelve months pre-IND all the way through an approved drug. They are going to be looking at the opportunity with a different perspective and bring a different set of skills than someone operating in the early-stage setting.

Marc: Exactly. Late-stage VCs do not need to be in the trenches with the company; the partnership will be more strategic. Late-stage VCs should help the company figure out what is the right way to position the company, how to raise even larger fundraisings in the future, how to build partnerships, how to think about exit strategy, and, if you are a tech company, what is the right the business model and go-to-market strategy. Late-stage VCs focus on building and funding the business for the long term.

How do I diligence a VC? How do I do my homework?

Marc: To me, there is no substitute for CEO references both for early-stage and late-stage VCs. You want to find CEOs from failed businesses they funded because you learn a lot about VCs from how they respond when things do not go well. Similarly, you want to find some companies that were not rocket ships from the start, companies where the VCs were early investors and on the board for a long time, or companies that had a CEO transition out. You want to find the conflict points along with the successes. To find the CEOs of these companies, you can go into Pitchbook to find out what companies the VC has backed and who were the CEOs. Do not just let them introduce you; go do your own work to find them.

Mitra: There needs to be trust in the relationship from the beginning and that comes not only from interactions with the VCs that work at that firm but also from talking with individuals that worked with them previously. These individuals do not need to just be CEOs that worked with them; they can be other VCs, angel investors, or past colleagues. Go on LinkedIn and see who the VCs at that firm are connected with that you are mutually connected with. That way, you can find out from different perspectives what these VCs are like. In addition, talk to the tech transfer office at your university. Over the years, they have built up knowledge about many VC firms, either through personal interactions or through the rumor mill. All these data points are going to come together to help give you a better picture of what your long-term relationship will be.

How do I know if the VC that offered me a term sheet is right for my company?

Mitra: It is like dating. In the best-case scenario, you have lots of VCs providing a term sheet and the opportunity to decide amongst several courtiers. In that situation, it is about figuring out whom you are best aligned with and where the most trust has been established. A mistake that is more common than you might expect is a first-time founder having multiple term sheets from several VCs and choosing the term sheet with the best pre-money valuation, rather than choosing the right VC for them. They choose solely on the terms of the agreement and not the VC who is going to provide the most value, not just financially, but through their networks, past experiences, and knowledge on how to build an early-stage company. You want to make sure that you think about it holistically.

Marc: Frankly, entrepreneurs and founders compromise all the time. They may have a VC provide them with a term sheet that they like but do not love. Should they hold out for another term sheet or take this bird in hand? There is no right answer, but it is okay to take the bird in hand. Raising money is hard. Unless you are confident that if you say no, you will get something else, often you do take the bird in hand. Even in a good funding environment, I would guess most of the companies that raised their first round only had one term sheet.

Mitra: You may like the VC but not the terms in the term sheet. When the terms are just not optimal in your view, you may need to be a bit more flexible and think long-term about what you are building. Know that your piece of the pie will be worth more if you are with the right VC. Even if the terms do not feel right, you can still build something great and generate a lot of return.

How do I know if I should have one or multiple investors in my financing round?

Mitra: There are different phenotypes of early-stage VCs that want to help build a company with you. Some VCs want to do the work that will lend them founder shares, so in that scenario, they would want to be the solo investor. Then there are VCs such as OUP that syndicate with other strong VCs. It takes a lot of muscle to build a company, and we want to give the company the best chance at success by bringing together multiple networks, resources, and experiences. At the end of the day, the scientific founder needs to be comfortable with that VC’s style and team regardless if it is one or multiple VCs in the round.

Marc: If you have a choice, it is always better to have more than one investor in a round. With multiple investors, you get different viewpoints, networks, and introductions. In the extreme, if something happens to one of the investors, and they cannot fund the next round, you have another investor. At the same time, you do not want ten investors in an early-stage round; I think having two or three investors is good. In the later-stage, your round size and sector will define it. If you are a biotech company raising $150M, you are going to need a lot of investors. If you are a tech company with a $30M round, that is probably one new late-stage investor writing a large check. The round size and the sector will determine the number of investors in a late-stage round.

What are some red flags that I should look for?

Mitra: This relationship is all built on trust. If someone is not delivering on what they are promising, even if it is small things, that is a red flag. If you feel like your VC partner is withholding information at any point, that is a huge red flag. Also, pay attention to the way that you are being spoken to – if there is a lack of respect, that is another red flag. There needs to be a core pillar of communication and transparency from the very beginning.

Marc: One would be investment approval dysfunction. This can look like the investor telling you one thing and not delivering, or a difficult process or approval path within the firm after the individual investor you are dealing with is interested in your startup. That often never changes – if they are difficult now, they will be difficult in the next round. Another one is renegotiating the term sheet in bad faith and not for a well-founded reason. A venture investor will often have a 30-day exclusivity period with their term sheet where you cannot negotiate with anyone else. Towards the end of that period, they may try to change the terms because of something that they knew two months ago. It is one thing to change the terms because they learned something in diligence that was unexpected, or the public market dropped along with all the comps, but if it is for a reason that they knew previously, they are just trying to take advantage of you and get a better deal.

Is there anything else that we should cover?

Marc: Understand where the investor is in their fund cycle – how big is the current fund they are investing out of, how many deals have they done, how many deals do they have left to do, and how do they handle reserves? Every once in a while, particularly in the market we are in now, a firm may have done a lot of deals and did not hold enough in reserves, so they do not have enough for future follow-on rounds. To find this out, just have a conversation with the VC but make sure to ask the right questions.