So this morning we completed one of our early Series B pitches to a prominent local venture capitalist. From my perspective, there weren’t any real surprises to come out of the conversation but I thought it might be interesting to share a few bits of commentary from the investor that I knew to be typical explanations for those times when you get a “NO” from an investor (we didn’t get that by the way).
Venture investors tend to evaluate these opportunities against two “risk” perspectives. The first perspective is the actual market risk that your plan may or may not face. That is, the investor tries to understand whether your efforts represent a “feature or a business” and whether or not the magnitude of the opportunity is really as big as you say. They additionally evaluate competitors in the space and your ability to gain a reasonably large slice of the total market pie.
The second “risk” that the investor is trying to determine is the balance of their own portfolio. In our conversation, we spent some good time talking about other companies in this VC’s portfolio to try to determine whether or not our proposition was sufficiently differentiated enough from other firms also doing work in imaging and photography. To use the words of this investor (whom I have a great deal of respect for and with whom I have worked in the past), “we try avoid situations where water may be running on the same side of the hill”. This was his way of trying to explain portfolio management to us. He elaborated on the idea that experienced VC’s have realized over the years that two companies doing very different things but in a similar, larger market segment will often gravitate to where the revenue opportunities are and wind up in the same puddle at the bottom of the hill. I agree that this phenomenon happens more often than not and I think his verbiage paints a good visual to explain it.
As ‘market leaders’ in our print-on-demand social network, we know that our story was compelling. But this conversation reminds me to think about future meetings with other VCs based on other companies already in their portfolio. Do you schedule those meetings at the top? Later? At the very least it is a good idea to get familiar with the other portfolio companies that could be considered - even broadly - as being in your same space. In this case, we are sufficiently differentiated enough that it was a valuable meeting for all parties to take.
In response to a comment left to the last post from Paul Brown at http://mult.ifario.us/a where Paul asks about this tricky scenario:
Entrepreneur: “We’re going great guns; this validates our thesis.”
Investor: “Why do you need my money now? Why aren’t your existing investors falling over themselves to reinvest?”
Paul is basically asking two things: first, ‘why are you raising money if you don’t need it’ and, second, ‘if you do need it why don’t your original investors just put in the money’?
The answer is because most investors have a certain investment stage criteria that they adhere to. Some prefer to only invest in seed and Series A stages and therefore invest smaller amounts of money to buy bigger percentages of the company while accepting that there is more risk to accomplish this. Other firms choose to invest more money at later stages and hope for lower risk factors as a result. So, depending on the stage you’re in you would probably be talking to two different kinds of firms. That is our case.
Having said that, it does seem more common than not that existing investor would also participate with new investors in later stage rounds. That isn’t always the case but it is good when existing investors prefer to do it and indicate as such because new lead investors will try to take as many ‘confidence cues’ from existing investors as they can.
