Know what makes your (seed) investors tick
Getting investment funding means accepting "Till do us part" for your startup
|Stephen Alred Jr.||Jan 16, 2019|
“You have an implicit Series A round stapled to every seed term sheet.” - Bryce Roberts, indieVC
This was something that Bryce said during his Atlanta stop of the indieVC road tour.
The quote stuck with me. I spent 5 or 6 months researching and studying the venture capital landscape last year in order to begin pitching partnerships (only one took me up on the offer). In that time I realized that at the seed/pre-seed stage your investment prowess is solidified...err validated...when the company raised a Series A.
Never did it occur to me that it’s deeper than that.
When Bryce states the quote above, the lightbulb flickered on. I took the night to sleep on it. The idea that the economics flat-out don’t work for seed investors if their portfolio companies don’t raise any extra rounds is incredible.
For startup founders, it pays to realize that taking on investors with “smart” money is paramount. This also means that you need to look at their portfolio and examine who they’ve raised from in their second and third rounds. When you are doing diligence on potential investors, be sure to go upstream and ask later-round VCs what it is like to work alongside the seed investor prospect.
These things are important. Knowing the incentives of your investors can make or break a company. Not in the day to day, tactical sense, but when you consider your expectations as founders. Once you take on an investor, they are basically with you on this ride until you buy them out (i.e. Wistia and Buffer) or you have an exit.
Speaking of exits…knowing your potential investor’s priorities when it comes to exit value will save you a lot of pain later on. A rule of thumb is that an investor invests with the idea that a startup can return their entire fund at exit.
A $50M fund is looking for a $50M exit with each investment they make. With a sub-10% success rate, your investors are incentivized to encourage a hold-out on an exit that could return them less than they expected.
Having institutional investors aren’t bad, KnowCap IO is about to begin actively looking for funding, but you need to know what makes them tick and if that aligns with the organization you want to build.