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So, all things being equal with deal terms and price, which factors are the most important to pre-seed and seed founders when choosing between two VCs?
Over half of respondents (53%) picked the fund’s understanding of their sector and business as one of the top 3 choices in choosing between VCs.
Working with investors that understand a niche and really ‘get’ the business can be a huge time saver for founders – they don’t have to educate investors on the nature of the pain point, or the potential value their solution unlocks. Instead, they can spend initial meetings building relationships and discussing future growth plans. So it’s clear why a founder would want to work with an investor who already understands their line of work.
But investors who are newer to certain segments shouldn’t be dismissed, as Frontline partner Zoe Chambers points out:
“For all the benefits that come with understanding a sector, sometimes people who are too close to a sector or problem area can only see flaws and down sides of a potential investment, which might put them off a good opportunity.
For instance, I was previously a corporate lawyer and have seen lots of legaltech startups, but only made one investment in the sector. Equally, areas I know very little about can be where I get most excited as an investor, because I get to be curious and to learn.”
The next most common option – personal relationship & chemistry with the person leading the deal – was chosen by just over a third (34%) of participants. Investing into a startup is a people-based decision by the investor, so it’s hardly surprising that the entrepreneur places high importance on the interpersonal relationship too. At the very least, founders need to be able to trust their investors, and feel comfortable reaching out to them in the bad times as well as the good.
“A high level of trust between entrepreneur and investor is crucial to a successful partnership. Taking a company from Seed to IPO typically takes around ten years – that’s longer than the average marriage in the US.
You’re going to be spending a lot of time with your early investors, so making sure you have a high level of trust and a deep relationship with them is pivotal.”
Coming in at a very close third was the capacity for the fund to make introductions to prospective customers, at 33%. This factor came significantly higher than any of us at Frontline predicted.
Of course, customers offer huge value to startups, and not just through revenue generation; their feedback, input on the product, and use in marketing materials are crucial for building a successful business.
But at seed stage – and every stage thereafter – it is imperative that the company understands and has access to their own customer base. In our eyes, it’s not something that should be outsourced to investors, and whilst a warm introduction might be better received than a cold one, if startups are unable to get the introduction themselves, then it’s likely that their marketing materials are lacking, or the value proposition isn’t resonating clearly enough. Helping founders to find an early reference customer for the sake of credibility is one thing, but going beyond that might mean covering up an issue that the company should be working on improving.
Meanwhile, we were surprised to see that positive references from other founders ranked relatively low, chosen by 22% of participants, and coming in 7th place. This is especially unexpected given that blind references on a founding team is the single most important diligence for early stage opportunities.
Chosen by just 5% of respondents, the option that was least likely to be chosen was the diversity of the fund team and how it might shape diversity on the founder’s cap table.
We have to remember the survey methodology here – it doesn’t necessarily mean that respondents think it’s the least important, it’s just the least likely to be in the top three most important factors.
And something that we’re increasingly coming across is founders carving out an allocation of their round for a diverse set of angels or networks, which isn’t visible through this data. So whilst diversity may not play into their top three factors when picking an individual fund, certain founders may well be considering this criteria when forming the rest of their syndicate.