Understanding your audience is probably the single largest factor when preparing for and then having success. Its no different when it comes to understanding and raising money from venture capitalists. In fact, its probably one of the most important (and overlooked) things you can screw up. I’ve been thinking about this lately as I talk with fellow entrepreneurs who are looking for investment capital and want advice or opinions on who they should talk to and what their best line of attack should be.
In my experience, no matter how a VC gets onto the career path to partner, they tend to always gravitate into 1 of 3 types of lead investment criteria. I think this understanding is generally not well understood by companies seeking to raise capital. Understanding the primary drivers of your audience results in less time wasted and less frustration for both.
1. The Market or Theme-driven investor
These investors seek out a major market theme and then learn everything there is to know about it. They are connectors, filters, and learners. They meet with everyone that covers, invests in, or tries to build a company in their particular focal area. If they’re right about the market and they do their job right of meeting everyone and looking at everything, then they have an obvious advantage over other investors pursuing the same market – and – they give their portfolio companies a huge boost with connections, partnerships, business development assistance, economic modeling, etc.
2. The People-driven investor
This type of investor bets primarily on entrepreneurs that have track records of demonstrable success. Over time, they form a “stable” of these entrepreneurs. Tracking, following, keeping in contact with people they want to back. They make good and focused use of their EIRs to start something and then they invest in that something. Oftentimes these investors will pass on a deal that has what could be phenomenal market potential, simply because they don’t like or don’t have any experience with the management team. Conversely, they will take on more market risk with a known and trusted management team with the driving belief being that the team will figure it out and create success.
3. The financial-driven investor
More often than not this group comes from investment banking or other professional investment backgrounds. They look for deals where they can apply some sort of financial leverage as the leading criteria for weighing whether or not to do a deal. The portfolios of these investors have a more private-equity look and feel. Portfolio companies that are capital intensive businesses, service driven businesses, roll-ups, and the like might also be there. Down-rounds are opportunities to consolidate positions, and creative use of leverage is common in their deals.
Obviously the successful venture investors apply all 3 of the above when making an investment decision, but understanding the primary criteria of your audience will make both sides lives easier and more productive.