4 suggestions from an investor: how to find the right VC that fits you?

Nov 15, 2021 Finance


Most founders may think that VC funding is a shortcut to success. But like so much else about running a tech startup, it isn't that simple. Raising money is often less important than who you raise it from. It turns out, quite often, a company is either not attractive to VCs, or it is attractive to multiple VCs at the same time. So most likely, if you are a founder raising capital from institutional VCs, you will have to make decisions on which VCs to go with.

How do you ensure you pick wisely? Here are some insights from Cao Darong, the managing director at Lightspeed China Partners.

When I returned to China in 2004, VC investment in startups was still in the early stages. I remember vividly when a startup said to me, "Please submit your Term Sheet by Friday, and if your price is high enough, I will pick you."

Now 10 years later, the competition in the investment market is getting fiercer and while no longer do startups call VCs for a project bidding session, new entrepreneurs are still facing the same question: How to choose the right VC for their business?

My view is that the hotter the market is, the more cautious early-stage startups need to be in choosing VCs. Compared to the logic of making a business plan, many startups are more likely to choose a VC based on experience or even intuition, especially for first-time entrepreneurs and first-time fundraisers.

Perhaps startups take it for granted that there is more money available in this market than good investment opportunities. However, I would say that when a VC is boldly ready to write you a check, it is important to remain calm and make a careful judgment. Of course, no one can give a correct principle on how to choose a VC, but we can start from some angles or methods to find the right VC for your business:

First, focus on values and culture. I would advise startups to put values and culture first. The reason is simple: choosing a VC is like choosing a working partner, so choosing the right partner is a necessary condition. And the core is to choose the right one, and this right one comes first from the value system and the identification of the corporate culture.

For example, what do they believe in terms of values? What do they pursue? In terms of organizational structure, is it hierarchical or flat? What is the decision-making process like? Is everyone within the organization passionate and capable of independent thinking? How do they handle relationships with each other and with partners ... The answers to these questions are all related to how a VC will help a company grow.

Within a VC organization, different people play different roles with different personalities, experiences, and influences. From junior associate to senior partner, the difference between whether you get good overall support and whether the investors you work alongside are like-minded can make all the difference in how you feel about the process and the result of acting. So I suggest that startups should consider these issues when they start to understand a VC, which will be decisive for the future development of the startup.

Second, build the right VC relationship. Bringing in an investor means starting a long and mutually supportive relationship. The right VC relationship is one where the entrepreneur and VC like working with one another, respecting each other, and trusting each other. Finding the right VC is like finding a happy marriage, but in reality, there are many examples of unhappy marriages. Likewise, when starting a business, the relationship with a VC is probably second only to the relationship between the partners in the business.

Ask yourself this: What is left in the relationship other than the relationship between the investor and the investee? When the investment is not going well and more money or time is needed, will the relationship change accordingly? Is the VC willing to be a "partner" in your growth, or does he act like a big boss? And is the VC working with a service mentality to the entrepreneur, or just using the entrepreneur to make money as a tool?

When a VC invests in you, some may simply see the startup as a project in their portfolio, or even as a bet. But conversely, there are VCs who are willing to act as a mentor to help you grow. When you internalize these questions and look for the answers in a VC's mannerisms and even actions, you will understand what kind of investment relationship you have.

Third, figure out the VC's expertise. It is the most important. Let me give you an example, in the field of consumer Internet, there are many hot topics that investors are looking for, such as mobile social, social games, social commerce, mobile platforms ... There are all kinds of buzzwords coming up. I have to confess the fact that in such a fast-growing emerging market as China, the strategies like casting a wide net and the human sea tactics seem to be copied by some VCs. They are not looking at the market itself behind these buzzwords, but more often than not just chasing one hot deal after another.

But in fact, VCs that are good at investing in the B2B area are not necessarily good at investing in the B2C area, and vice versa. Because even in the same industry, there are different development paths within it. For example, SaaS, cloud computing, security, storage, big data, etc., behind which are different business models. In addition to technical understanding and trend judgment, investors need to have completely different professional capabilities.

Therefore, whether a VC understands the field and has a deep understanding of what the startup is doing will directly determine whether it is an "investment" or a "speculation". It also determines whether they are a leader in the growth of a startup or a trader in the operation of capital.

How do you come to these judgments? You can look at the investor's past projects and experience to understand his level of expertise and his business model. A VC with a deep understanding of the industry being invested in can provide entrepreneurs with more knowledge and resources in the field of their industry, helping them to think strategically so that the business can grow faster.

Fourth, do background research. A responsible VC, before investing in companies will certainly require companies to provide a background investigation list and use their channels to investigate. Generally, through the investigation of four or five related people, you can make the VC have a clearer understanding of an entrepreneur. But I rarely hear entrepreneurs ask for background checks on VCs, at least in my investment process, and I am still a bit surprised by the small number of entrepreneurs who may rarely ask us for such requests each year.

Actually, in the US investment market, it is common for startups to do background checks on VCs, and sometimes asking each other more questions helps each other make the right decision.

Years ago, when I was chatting with the CEO of a project company invested by Lightspeed in the U.S., I learned that he had done a lot of background checks on one of Lightspeed's partners before choosing Lightspeed, including understanding the partner's personality and understanding of the industry through some people around him and the CEO of some projects the fund had invested in at that time. He joked that the evaluation of the partner after the background check was "this partner knows the industry, but his personality is a bit irritable, but he is still a reliable person." Eventually, the CEO accepted the investment.

The VC industry is a relatively low threshold industry, as long as you have a sum of money willing to take risks, you can do VC. But China's investment market has passed the initial budding stage of development and is now maturing, the amount of money is no longer the key to making a VC favored. Although there is no perfect VC, there must be the most suitable VC for entrepreneurs themselves, which is why I want to share with entrepreneurs the key points of choosing a VC. After all, choosing a VC is like hiring a new employee, but the difference is that once you've chosen this particular employee or team, it can be difficult to fire them in the middle of the process.

This is an article from Sohu, written by Cao Darong, the WeChat official account is Lightspeed China Partners (ID: lightspeed_cp).