Category Archives: vc-faq

Sometimes Bigger is Better

Round size is a topic that always makes me chuckle when entrepreneurs share the feedback they hear on the fundraising trail. Every fund has refined the story that fits their fund, regardless of the business: larger fund = raise more money, smaller fund = raise less money.

I don’t think most VCs are being disingenuous, at least not consciously. They are sharing what has worked for them — remember, most of the industry is about pattern-matching what has succeeded in the past.

Larger funds share the virtues of taking more money up-front, accelerating quickly and keeping yourself off the fundraising treadmill. Smaller funds share the wisdom of taking only the money necessary to hit key milestones, while keeping dilution to a minimum until raising more against value-creating events. There is value in both perspectives, but keep these tendencies in mind — they have nothing to do with your business.

This blog post was sparked by an entrepreneur asking me today about the best round size for his business. Despite my fund’s focus on $1-5M rounds and my excitement about the business, my advice was to pursue a $10M+ early round. Why? Because the company has some significant early risk that can only be reduced by closing some major/difficult deals or securing a large warchest. Thus, closing $3-6M funding could actually be harder than closing $10-15M, begging the question about life/death, not dilution. Sounds weird, huh? Well, for this company a bigger round could make sense.

Make sure the answers you get make sense for your company, not just the fund across the table…

Customer Interest != Big Opportunity

We had a couple interesting entrepreneurs present today, but they both fell into a trap that snares many entrepreneurs pitching institutional VCs. They both built their businesses from the ground up, based upon market/customer requests — that part is super! However, they both equated early customer interest with big opportunity — that’s…well…less than super.

Demonstrating customer interest jumps an entrepreneur ahead of all the idea-on-a-napkin entrepreneurs who just assume customers will flock to their big idea. However, when institutional investors ask questions about the size of the opportunity, including market size and scalability, referring to current customer interest really doesn’t address the question.

This issue is particularly acute with entrepreneurs who have been successful raising angel money because some angels equate the two, or worse, just get excited about the early customer interest (forgetting about how big the business can be). Those entrepreneurs often repeat the mantra of “customers love our product” when the VC’s real questions are how many of those customers exist, how many competitors will enter your market when they see how lucrative it is and how will you scale early customer interest into a business that sustains itself — HOW BIG CAN THIS BE!

Understanding the difference between these two concepts, and demonstrating it during VC Q&A can really aid a presentation…