VC Perspectives

A question that I often get is how startups should approach VCs. And similar to what Mark Davis suggests in an excellent post, my advice is: Don’t start with the question of how to approach a VC. Instead, start with the question of who to approach.

At Creandum, we screen several hundred companies per year and invest in 3-4 (having discussed this with other VCs, it seems like a hit rate of around 1-2% is pretty common at least in the Nordics). So to improve your odds at not only getting a meeting with the VC but actually walking away with some money, make sure you pick the right VCs to contact.

Contacting the right VC

Here are a few things to consider when evaluating the match between your startup and the VC:

• Portfolio - Check out our portfolio. What investments have we done (stage, technology, region etc)? Do we like to syndicate, i.e. invest with others?
• Focus - What are we looking for? As an example, at Creandum we’re looking for companies that have the potential of becoming successful international companies exiting at €100M or more. This means rapid growth and limited “me-to” opportunities.
• Individuals - usually VCs have short bios of the investment teams. Do we have people that are likely to understand your product and market? (this usually increase the odds but not always, sometimes it is easier to get excited when one doesn’t understand all issues…).
• Fund characteristics - the size and age of the fund plays a big role in how a VC invests. Usually VCs have funds of 10 years. During the first 4-5 years we invest in new companies, then we only make follow-on investments. And the fresher the fund, the more likely it is that the VC will make early-stage investments. Why? Because at the end of the investment period, there is not enough time for the younger companies to developed into large exits.

Contacting the VC

The process differs from VC to VC, but here’s how I would go about it (based on how I like to be approached):

1. Try and get a referral from entrepreneur, other VC, friend/advisor of the firm, portfolio company - Someone that can vouch for you and get them to introduce you to us.
2. Make yourself known to the VCs - PR works, we do read blogs & articles.
3. Create a really good presentation of what you do and send it to us - I prefer powerpoint/keynote of around 10-15 slides. Explaining what the presentation will look like probably merits a blog post on its own, so let’s come back to that later.

If you have selected a VC that invests in companies with your profile and you nail at least one of the above points, you’re more than likely to get the meeting.

Mark Peter Davis posted a blog entry with the title “The Best Time To Raise Money Is When You Can”, which I think is worth a read. This may sounds obvious at least when considering the opposite: raising money when you can’t but there’s actually a bit more too it.

Also, this is not just true for VC-financing, the same logic applies for extending your credit line or negotiating a new loan with the bank. At the moment, it is pretty tough to get any of that from the bank but in general they are much more likely to extend your credit line when revenues are up and you have plenty of cash. Another aspect of this is actually to use some of the credit line even when you don’t really need it. We have seen several cases where the banks withdrew unused credit lines at the beginning of the credit crunch but couldn’t do the same to the ones being used.

This discussion may not be applicable for companies that don’t have the cash to start with but hopefully most will some day come to such a position and then it could be worth remembering that money is never as cheap as when you already have it.