As a “new” VC I still manage to view the dynamics of my industry with a fresh set of eyes. One of the things I have been surprised by, and which entrepreneurs should keep in mind, is the asymmetry between the speed of an investment round and the long term relationship it is meant to be cementing.
VC investment rounds, especially those for good companies in competitive situations, happen very fast. There is the famous story of a $5 million Series A being done in 24 hours. When a company has momentum and has a good story, the dance with potential investors happens at Tinder speed. Meet, meet again, term sheet, contract, swipe right, it’s a match!
But, as I said before, the VC documents are just the pre-nup. The relationship being established is meant to last several years. The average time to exit for a technology company, according to data from CB Insight, is between 60 and 80 months.
And this average does not take into account the 50–60% of seed-funded companies that “fail” by either not being able to raise a new round or returning less than 1X to their investors.
That means that the entrepreneur and the investor are embarking in a relationship that can be as long as the infamous “Seven Year itch” many marriages are said to face. The relationship equivalent would be meeting someone on Tinder, going on a date and then heading straight to the altar at some Vegas venue to sign legal documents for a long-term relationship.
Which is why entrepreneurs should think about building relationships, having informal chats and getting to know VCs even when they are not raising. This is a courting process and you should feel comfortable doing your own part of the dance.
Fred Wilson had a great post about a company he had met (which ended up being Hailo) where they passed on an investment but liked the team and when the team came back a year later having delivered on all the metrics they had said a year earlier, the USV team led their next round.
There was recently a startup in London that was raising its Series A (I loved the founders and their passion, and while we ended up not doing the deal I am still cheering for them from the sidelines). During the courting process the founders asked me for the names of 2 entrepreneurs we had backed and were doing well and at least one name of an entrepreneur we had backed where things were not on track. I actually loved the fact that they were asking to do as much due diligence on me as I was doing on them. It proved that they understood the long-term nature of the relationship we were trying to build and the fact that the road might not always be perfect, just like in romantic relationship.
There is another European startup that we are planning to back where the founder and I have been having regular coffee chats for over 4 months. During that time he has refined the product, built out a team and gotten to the stage where it makes sense to raise a round. We courted in the right way, learnt about each other and had open conversations about his ambition and how we could work together. He slowed things down, took it easy and we’re now writing up the pre-nup knowing full well that this is going to be a long-term thing.
Update: Kyle Judah pointed me to Mark Suster’s post on this subject titled Investing in Lines not in Dots which has some great advice on how to make fundraising and VC relationships a part of any entrepreneurs regular job: “don’t allocate two months of each year to “hardcore funding activities” but allocate a regular amount of time each month to it like any other job function.”